“If your retention is poor then nothing else matter” saied Brian Belfour. As you should know, customer lifetime value (CLTV) is an important metric that measures the growth of an organization. It indicates the expected profit from each customer by considering the entire future relationship. Running a SaaS business requires you to keep track of this metric as it will help you align business strategies and ensure that you head in the right direction.
If you do not monitor this metric, your company will have no accountability and it would be difficult to keep growth in check. Thus, you would be unable to take necessary corrective measures. This post takes a close look at customer lifetime value and customer success. Learning more about the metric will enable your customer success team to find out how much income can be generated from a customer.
As you may have guessed, customer lifetime value (CLTV) is a metric that calculates the total revenue a business can expect from a single customer account throughout the business relationship. To be more precise, it is the gross profit a customer delivers to your business in their lifetime. Hence, you can rely on it for important calculations.
CLTV = [Average Revenue per User or Unit (ARPU) - service cost] X Customer Lifetime
Or CLTV = [Average Revenue per User or Unit (ARPU) X Gross Margin %] X Customer Lifetime
With: Gross Margin % = 100% – Cost of Goods Sold (COGS)
To get a better idea about CLTV, let’s do an example:
If a customer spends $3,000 annually, his or her ARPU would be $3000. This means that to deliver this service, it will cost you $500 considering the fact that the average life of a customer is 5 years. The formula will be calculated as below.
CLTV = ($3,000 APRU – $500 service cost) X 5 customer lifetime = $12,500
"Only 16% of companies have calculated the Average Lifetime Value of their customers" according to the Supper office while it is a key metric for your CS team for several reasons as mentioned below.
If you are still not convinced why you should use customer lifetime value, the following reasons will encourage you to give it a try.
One of the main reasons why you need to measure customer lifetime value is because it allows you to learn more about your target audience. When you know your target audience, you get to engage in the right marketing efforts for better targeting them. Find out your ideal customers by analyzing your existing customer base through CLTV.
Another reason why customer lifetime value is of immense importance is that it helps determine customer segmentation. Focus on your top-performing segment by using the metric. As you analyze subgroups within your target audience, you get to deliver tailored messaging for establishing a stronger connection with each subgroup.
CLTV is also an incredible metric as it can be used for measuring customer loyalty and retention. When you focus on CLTV, you get to optimize and provide value to your customers in the form of a loyalty program. This leads to an increase in customer loyalty. Thus, you get to measure loyalty and focus on reducing your churn rate. This allows for an increase in sales, positive reviews, and referrals.
In addition to the above, customer lifetime value can be utilized for reducing acquisition costs and increasing overall profitability. Since acquiring new customers is expensive, it makes sense to rely on the metric for cutting down acquisition costs. An increase in retention rate helps increase profitability.
Lastly, CLTV is a metric that allows you to fine-tune your business. By improving customer lifespan, purchase frequency, and purchase value, you get to take your company to the next level. Each of these components requires you to develop the right strategy.
Now that you know more about CLTV, you must be wondering how you can improve its performance. Here is how you can make progress.
One of the best ways to increase your CLTV is by adding personalization. Customers love personalization and demand that you make special offerings. Including personalization capabilities will lead to a positive change in the customer lifetime value. Your customers will become more loyal and be easier to retain through personalization.
If you want to increase your CLTV to ensure that your customers stick around, you must focus on improving the quality of your service. You must evaluate the quality of service that your competitors provide and strive towards ensuring that your service has a higher quality than them.
CLTV has a positive impact on customer acquisition costs. You can find the relevant ratio for your business to uncover how CLTV can help you cut down CAC.
CAC refers to the cost involved in acquiring new customers. It includes marketing and sales costs.
If we take the same example from before, CLTV = $12,500.
If the CAC = $3000 for the account, CLTV/CAC ratio would be 12,500/3000 = 4.17.
Generally, a CLTV CAC ratio ≥ 3 would be considered healthy. CLTV/CAC’s effectiveness as a metric should not be overlooked. It is important that you calculate the ratio for acquiring new customers.
On the whole, now that you know better about CLTV and the importance this metric has, you should be able to use it at any time. CLV is the heart of your long term relationship with your customer so be careful and take care of it.