How can we calculate the Customer Lifetime Value(CLTV) for SaaS?
Software as a service (SaaS) organisations must understand and optimise customer lifetime value (CLTV) for sustained growth and profitability in the competitive market. A customer’s lifetime value (CLTV) is the anticipated monetary gain from their association with the business. In order to make educated decisions about client acquisition, retention, and expansion, SaaS companies rely on precise CLTV calculations. In order to drive business success, let’s dive into the method of calculating CLTV.
So what is CLTV?
Customer lifetime value (CLTV) is an effective measure that measures the worth of a customer to a company over time. It factors in the one-time sale as well as the lifetime value of the consumer through subscriptions, upsells, and cross-sells. In order to maximise marketing and sales efforts, prioritise high-value customers, and allocate resources effectively, SaaS companies might evaluate CLTV.
Here I’m going to calculate CLTV!
before jumping into the equation first, let’s try to understand and calculate the attributes used for finding CLTV. Ok then! let's see the attributes
Average Revenue per Account (ARPA): Find out how much money each client account made on average over a certain time frame.This includes subscription fees, additional purchases, and upgrades.
Gross Margin (GM): Calculate the gross margin percentage, which is the amount of money that remains after deducting the cost of goods sold (COGS). This includes infrastructure costs, customer support, and overhead expenses.
Churn Rate (CR): Determine the proportion of subscribers that cancel or churn out of the service within a specified time frame. Both involuntary and voluntary churn are included in this.
Average Customer Lifespan (ACL): Calculate the average duration of time a consumer stays a subscriber before quitting. This can be calculated by dividing 1 by the churn rate.
Now finally here we are to find the CLTV!
Use the following formula to calculate CLTV
CLTV = ARPA * GM * ACL
Hope you are able to understand, don’t stop I also want to tell you one thing
Why do we need to calculate CLTV is it so relevant?
Yes, because it helps in the following things;
Strategic Decision-Making: SaaS enterprises may customise their offers and services to match changing needs thanks to CLTV’s insightful data on client behaviour and preferences.
Customer Acquisition: SaaS organisations can more effectively devote resources to customer acquisition channels that deliver the highest CLTV by knowing the long-term worth of their clients.
Retention tactics: SaaS organisations can take proactive measures to retain customers by implementing tactics like upgrading product features, improving customer service, and providing incentives to loyal customers, by identifying the factors that lead to customer turnover.
Revenue Forecasting: SaaS organisations can set reasonable growth targets and manage funds appropriately by using CLTV as a predictive metric for revenue forecasting.
To conclude Calculating Customer Lifetime Value is crucial for promoting sustainable growth and optimising profitability in the ever-changing SaaS industry. SaaS organisations can foster robust customer connections, improve customer happiness, and secure long-term market success by comprehending the long-term worth of customers and putting measures into place to optimise CLTV.
I hope you like this blog, until next time bye!!!
