Calculating Customer Lifetime Value: The Formula Every SaaS Business Should Know

Zuora looked at subscription-based software businesses in 2019 and found that those with high retention rates grew 20% faster than those with lower rates. It’s not a surprise. You can’t say enough about how important it is for SaaS companies to get the most out of each customer over time. But getting this done takes more than just getting new customers. You also need to understand and improve Customer Lifetime Value (CLV), which is a key metric for long-term SaaS success. This article will explain the CLV equation, talk about what it means for businesses strategically, and look at how SaaS companies can use it to do well, even when they have problems like customers leaving.

How much does a customer last?

Customer Lifetime Value, or CLV, is how much money a business thinks it will make from a single customer over the course of their relationship. It’s an important metric for SaaS companies because their recurring revenue models depend on keeping customers for a long time.

Most of the time, the CLV equation looks like this:

Average Revenue Per User (ARPU) times Gross Margin times Churn Rate gives you CLV.

Each of these variables is a chance to make the business more profitable. Let’s break down the equation and think about what we can do to increase CLV and decrease the number of customers who leave.

Step 1: Try to get the highest average revenue per user (ARPU).

ARPU shows how much money each customer brought in on average during a certain time period. These steps can help SaaS companies raise ARPU:

1. Cross-selling and up-selling

By combining marketing, sales, and customer service tools, products like HubSpot’s CRM suite are great for upselling. Businesses can make more money without getting new customers by giving existing customers access to premium features or services that work well with their current ones.

2. Pricing based on value

ProfitWell did a study that showed that companies whose prices were optimised saw their sales grow by 30%. Higher ARPU can be achieved by setting different price levels, providing business-level packages, or charging based on usage.

3. Customised add-ons

Customers are interested in tailored solutions. For example, Dropbox raised its ARPU by making premium plans with more storage and tools for working together that were designed specifically for teams.

Step 2: Getting higher gross margins

Gross margin is the amount of money that is left over after direct costs like hosting or customer service are taken out. For SaaS companies, increasing their gross margins usually means making their operations more efficient. How to do it:

1. Infrastructure that works better

Using cloud hosting services like AWS or Azure can help you save money while still letting you grow. Investing in technology infrastructure also makes sure that customers have a good experience, which makes them more likely to stick around.

2. Customer service that is automated

AI-driven FAQs, chatbots, and self-service knowledge bases cut down on the need for human help. These not only help the bottom line, but they also make customers happier.

3. Quick and Easy Onboarding

If your onboarding process isn’t good, customers may leave within the first 90 days. Onboarding processes that are easy to understand and use save money and keep people interested over time.

Step 3: Lower the rate of customer departure

Many SaaS companies’ weak spot is churn, which is the number of customers who cancel their subscription. It costs more to get new customers and the CLV goes down when you lose an old one. To stop customers from leaving, think about these ideas:

1. Proactively interacting with clients

Check in with users often, ask for feedback, and fix problems before they get worse. Customer success teams can stay in touch and quickly solve problems with tools like HubSpot’s Service Hub.

2. Analytics for Prediction

Use AI-powered models to find signs of churn, like fewer logins or less use of features. Once you know who they are, you can reach them with targeted campaigns or personalised offers.

3. Making a loop of loyalty

Customers stay hooked when you keep giving them value. Long-term relationships are built on SaaS platforms that offer regular updates, educational content, or community events.

Fun fact: Harvard Business Review says that if you can keep 5% more of your customers, your profits will go up by 25% to 95%. Because of this, every customer that leaves is a missed chance for exponential growth.

Data’s Role in CLV Optimisation

Data is essential for understanding CLV and making it better. SaaS businesses should spend money on strong analytics platforms to:

1. Divide customers into groups

Sort your customers into high-value and low-value groups and then allocate your resources accordingly. For example, personalised onboarding sessions might be needed for high-value customers, while automated touchpoints would be better for others.

2. Find out how healthy your customers are

Frequency of use, satisfaction ratings, and support tickets are all metrics that can be used to keep an eye on customers’ happiness and stop them from leaving.

3. Try out campaigns to keep customers

A/B testing re-engagement emails, discount offers, or news about new features can show you what customers who are likely to leave respond to best.

Use in the real world: Netflix and CLV

Netflix shows us how to get the most out of CLV. Netflix keeps users interested by making highly personalised suggestions based on user data analysis. Its multi-tier pricing structure lets it serve a lot of people while also raising ARPU. Another way Netflix keeps subscribers from leaving is by making exclusive content that makes them feel like they’ll miss out (FOMO). As a result? Netflix has more than 230 million subscribers around the world as of 2023, and its rate of customer loss is much lower than the average for the industry.

Putting together the pieces: CLV and Customers Who Have Left

Remember that customers who have left don’t have to be a lost cause. SaaS companies can get them back by running reactivation campaigns, giving them special deals, or fixing the problems that made them leave in the first place. It’s often cheaper to get back in touch with old customers than to get new ones, so this is an overlooked way to increase CLV.

How HubSpot Can Help You Get the Most CLV

HubSpot has a platform that helps SaaS companies track and improve Customer Lifetime Value. Its CRM tools give real-time information about ARPU and how customers act, which lets it make personalised plans for upselling and keeping customers. Additionally, HubSpot’s Service Hub gives teams the tools they need to proactively address customer concerns, which keeps customers from leaving and boosts satisfaction. The automation features of the platform make tasks like onboarding and support easier, which improves operational efficiency and increases gross margins.

Want to keep customers from leaving and get the most out of your CLV strategy? Set up a free demo with Ale, our HubSpot expert, to see how HubSpot can change your SaaS business.

To master the Customer Lifetime Value equation, you need to do more than just understand the numbers. You also need to use every interaction, insight, and chance to build lasting relationships with customers. Your SaaS business can do well in a crowded market with tools like HubSpot. Each customer can help your business grow. Book your free Demo Here

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