Eliminating the unknown and replacing it with data
A Quick Guide to Understanding the Saas LTV Rate
What is the Customer Lifetime Value?
Wondering what LTV in business is? The customer lifetime value SaaS metric, LTV or CLV for short, is the estimated amount a paying user will spend on your service or product throughout your entire relationship. Knowing the average customer value of your existing users will allow you to identify your most valuable customers. And that is always essential information.
The LTV (lifetime value) rate will also push you to focus your marketing efforts on the repeat customer segment.
How to Calculate SaaS CLV
As with all Saas metrics, you will need to use a specific formula to calculate the LTV (lifetime value), you will need to use a specific formula. However, in this particular instance, the formula contains two additional metrics you should be aware of, ARPU ( Average Revenue Per User) and the Churn rate.
The lifetime value SaaS formula is the following:
LTV = ARPU / User Churn
Keep in mind: When calculating the average profit per user, make sure you subtract the cost of the goods sold, account management, and customer service from your ARPU.
User Data for Correctly Measuring Customer Lifetime Value
In calculating the LTV long-term value, you need to consider the number of users from which you can collect data. To have a conclusive LTV, you can later on use in your strategies and business decisions, make sure you are collecting LTV data for a sufficient number of users. So, here are the limits you need to address. If your subscription model business has:
- Less than 100 users, your sample size for LTV calculation needs to be at least 50% – however, in this situation, you could consider all your users.
- 1,000 to 10,000 users, your sample size needs to be at least 10% of user data.
- With ver 1.000.000 users, your sample size needs to be at least 1% of your total user number.
Top 3 Reasons Why the SaaS Customer Lifetime Value is Important
Obtain Higher Profit Margins
Knowing your saas lifetime value rate definitely impacts your company’s profitability. Converting prospects into customers is an end goal, but that can lead to an increased CAC. So, in the end, although you might think that you are gaining more revenue, you are losing money. When calculating LTV and doing your best to improve it, you are lowering the CAC rate and increasing revenue from existing customers. Your ROI is growing because you are reducing the cost per acquisition and boosting the average customer lifetime value.
Understand How your Products are Viewed
The higher your LTV users are, the better it is for your business. It means you are doing a great job. A high customer lifetime value indicates that you have loyal customers that love investing in your SaaS company. So, the goal is to use the LTV formula SaaS regularly to track the average amount your customers are spending, especially if you are looking to seek investors. Yes, the LTV business rate is a metric you want to show in your funding discussions
Refine Customer Segments with Greater Budgets
Wondering what is LTV in business? Other than a beneficial metric? Your possibility to increase marketing spending would allow you to gain more customers. By staying on top of your CLV SaaS metric, you will know when you can spend more on targeting specific customer segments, thus increasing the average purchase value and obtaining a higher profit margin.
The ARPU Vs. LTV Debate
The ARPU vs. LTV debate is a real thing, especially since they both measure similar things. That doesn’t mean that they are the same. They are very different metrics, although many users get confused about them.
The ARPU LTV discussion revolves around the idea of profit. At the same time, ARPU looks at the average customer value, whereas the CLV SaaS metric considers the overall revenue. That is actually why the customer lifetime value formula includes ARPU.
While understanding the user, LTV is important to have a comprehensive view of the profitability of your business. The average customer value will help you know your most popular products. Information of this kind can fuel sales & marketing strategies which will ultimately increase the LTV SaaS metric and your company’s total revenue.
So, even though they are different, the two metrics are very much connected.