Money… No one wants to lose it, right?
Every company wants to make sure they’re spending money wisely. Calculating how much profit your customers are going to make you throughout the entire time they spend with you is absolutely crucial. But how can you do that effectively? Easy: by tracking the SaaS LTV (the average lifetime value) of your customers.
LTV is a super useful metric that lets you know who your most high-value customers are, so you can focus on them – after all, they are the ones that earn you the most profit. These are the customers that will be helping you grow as a company, so it’s important to take care of them. But what exactly is the average LTV in SaaS? How can you calculate it? And most importantly, how can you increase it to keep your company growing?
Learn how LTV can transform your strategy in SaaS, including:
- What is LTV?
- How to Calculate LTV?
- Why is it important to track LTV?
- How to increase your Customer Lifetime Value?
- How to Increase LTV in SaaS
Ready? Let’s dive in!
What is LTV in SaaS?
Lifetime value (LTV) is a metric that gives SaaS companies the total-predicted amount of profit a customer will give their companies during their relationship with them. The longer they stay, the higher their LTV will be.
So, say your subscription charges $200/month, and a customer stays with you for 24 months – their LTV would be $200 x 24, which means that you’ll have a profit of $4,800.
But what will actually help your business grow is to calculate the average lifetime value of all your customers. This will lead to a better understanding of your business as a whole and show you exactly where you should focus your energy and resources.
How to Calculate LTV in SaaS?
So, to calculate your customer’s LTV, first, you need to also understand two other metrics: Churn rate and Average Revenue Per User (ARPU).
- Churn rate is the percentage of customers that decided to stop paying for your SaaS product or canceled the subscription over a period of time. You can use this calculator to measure it correctly!
- Average revenue per user (ARPU) measures the average amount of money generated by each customer of your product over a period of time. It’s usually calculated on a monthly basis, so you’ll also need to measure monthly recurring revenue (MRR).
Now that we’ve refreshed these concepts, let’s calculate the LTV. There are different formulas used for different needs.
- When all your customers have roughly the same ARPU, and there is no expansion revenue expected, you can use:
LTV = ARPU × Customer Lifetime
- But that’s not usually the case, so when the ARPU varies, you can use:
LTV= ARPU / User Churn Rate
As you can see, LTV is hugely affected by other metrics. So how exactly do they interact? Let’s take a look at two important metrics and how they relate to LTV – Customer Acquisition Costs (CAC) and churn.
CAC and LTV
Calculating your customers’ LTV gives you an insight into how much money you can spend on your Customer Acquisition Costs (CAC). If a customer costs you $100, but their LTV is $600, that’d be giving you $500 in profit!
Your business will grow faster when your CAC is lower than your LTV – you’ll be able to focus on the right customers and make smarter decisions.
Churn and LTV
It’s no surprise that the customers that are on the lowest-priced subscription plans are also the first ones to churn.
Keep these customers in mind when spending money acquiring new ones – is your lowest-priced subscription plan good enough to keep them for a long period of time? Will their TTV be fast enough so that they stay? Knowing each customer’s LTV gives you incredible insight into how to spend your money wisely.
Why is it important to track LTV in SaaS?
Tracking the average lifetime value of your customers improves the profitability of your business. After all, staying customers lower your CAC, and spending customers increase your LTV – it’s no surprise that 65% of profits are from existing customers! Let’s see what tracking your customer’s LTV will do for you:
- Reduce your CAC. A good LTV: CAC ratio should be at least 3:1, ensuring good business performance and prospects of growth. You can segment your customers based on where you acquired them, so you can identify which ones converted into the most profitable ones.
- Give you an idea of your SaaS financial profitability. Being aware of your customers’ LTV allows you to have better insight into what the future holds for your company. Also, you’ll be able to make smarter decisions in the future.
- Identify loyal customers. Identifying your most loyal customers allows you to provide them with an incredible customer experience that will translate into them becoming willing brand ambassadors and bringing you more loyal customers.
Now that you know why it’s important to track it, let’s see how you can increase your customer lifetime value.
How to increase your Customer Lifetime Value?
You know the average lifetime value of your customers – but now what? How do you actually use this information to grow your business? Let’s see what you can do to improve your LTV:
1. Set an LTV goal
This one looks simple, but it’s easy to forget: setting goals will motivate and force you to strategize more smartly. This is when LTV comes in handy – by looking at your historical numbers, you’ll not only be able to see what your statistics are but also plan accordingly.
2. Get in touch with high-LTV customers
Identify your most valuable customers by filtering out active and inactive users and identifying which ones have a higher LTV. Then, go and talk to them! This way, you’ll be able to gather important information, like what features they use most, who in their company uses the product, or what they use it for on a daily basis. And also, how they found you!
3. Find out LTV per Customer Segment
It’s super important to break your customers into smaller groups. For SaaS businesses that offer subscription plans, divide them between the highest-paying customers and the lowest. The lowest-paying plans will likely have lower customer LTV – which means a higher churn rate. By segmenting your customers, you can focus on the high LTV ones and keep your eyes on the prize.
4. Reduce Churn
To ensure that your customers stay using your product for as long as possible and increase their LTV, focus on stopping churn. Is it high? Who are the customers most likely to churn? Take this into account, and make plans to stop it from happening.
5. Increase ARPU
Reducing churn is not the only way to increase your customers’ LTV – focusing on increasing your ARPU is equally important. Raise your prices (the highest-paying customers have higher LTV) and expand revenue tactics – this way, your existing customers will stay and keep giving you profit.
How to Increase LTV in SaaS
The average lifetime value of your customers is an important metric that lets you know which clients are the most profitable for your business. By tracking it, you’ll have insight into how to increase your customers’ LTV, reduce churn and increase your average revenue per customer. Knowing your customers’ average LTV in SaaS is super useful to accelerate growth and customer satisfaction. After all, that’s what we’re all here for!
Ready to start tracking your LTV and leading your SaaS to success? Book a demo with FROGED to learn more about how you can reduce churn and increase the average customer LTV of your SaaS.