From churn rate to gross margin, you need to track numerous metrics as a SaaS company owner. Among all these metrics, customer lifetime value or simply LTV or CLV can be the trickiest for you. This metric is full of mysteries as once you calculate it, you have no idea where to use it. You may even struggle to find out whether your company’s LTV is bad or good.
In today’s post, we are all set to demystify this metric and will give some useful I rights into the details related to how to calculate CLV and how you can use it.
Decoding Customer Lifetime Value (LTV)
Customer lifetime value is the amount your customers spend on your company throughout the relationship. It is simply referred to as the revenue your company generates from customers throughout the time they stick with your products or services.
Let’s say you have a customer who pays $100 every month for your services and stays for 9 months. So, the total LTV for that customer will be 9 × 100= $900.
Mastering Customer Lifetime Value Calculation
The formula we used in the above example is for a single customer only and hopefully, your business will have more than this number of customers. Therefore, you need to find a method to estimate LTV which offers more detailed and precise calculations.
When estimating the churn rate, you need to have a look at the churn rate and ARPU.
Churn Rate
It is the number of customers who are no longer using your services or simply not paying you in a given period. For example, if you had 200 customers last month and 10 of them left, the churn rate will be 5%.
Average Revenue Per User
ARPU is the average revenue you generate by selling your products or services. It is simply called MRR as well.
LTV Formula
Using ARPU
The formula will be:
LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime
Using Churn Rate
The formula will be:
LTV = ARPU / User Churn
Churn rate is a readily available metric, so you can easily find LTV using it.
When your company’s churn rate is higher, the LTV will be lower. Paying attention to both these metrics is critical for the smooth growth of your business.
You got lucky there as Baremetrics can help you in keeping an eye on the churn rate and its impact on the LTV and your business. Using this tool, you can track and analyze the LTV of your business as well.
Navigating Churn Variance Dynamics
Estimating churn for your company can be messy. It is often due to the variations. For example, in my cohort, you can experience a cliff right after the first month of signing new customers.
To deal with these variations, you need to multiply it with the discount rate. It is basically discounting the cash flow losses in the upcoming days.
((ARPU x Profit Per User)/Churn rate) x .75
Here, 0.75 is the discount rate.
Sample Size
When estimating churn, you must pay special attention to the sample size as well. It is all about making your data and calculations scientifically valid. The basic guidelines for sample size are:
If you have 100 customers, then you must count in the data of at least 50% customers.
If you have 1000 to 10,000 users, you need to count in the data of at least 10% customers.
If your company has more than q Million users, then only 1% of the data will be enough to estimate LTV.
CAC and LTV Synergy
CAC is the amount you have to spend to acquire new customers. LYV guides you about how much you can spend to acquire new clients or subscribers. That’s one of the primary reasons why LTV is so crucial for any SaaS company. For instance, if you spend $100 to get a customer with an LTV of $500, then the actual revenue you get from that customer will be $400.
For seamless growth of your business, you need to keep your CAC value lower and LTV higher. If you know how much the customer will spend throughout the relationship, you can easily understand the customers’ value and find how much you can spend to acquire them.
LTV to ACA ratio must not be lower than 3. If it’s lower than that, it means you are spending a lot of money as CAC.
Relation Between LTV and Churn
Churn is a venomous word for any SaaS business owner. It’s the reason why your company is having variations in LTV.
In general, the customers on the lowest paying plans tend to churn more than those who are on higher plans. You must have remembered what we mentioned in the last section, LTV can derive what you can spend to get new customers. Let’s say acquiring a customer by spending $400 with an LTV of $200 will be a useless approach as it will lead to loss.
You need to estimate the LTV of every segment is crucial for your business as it will help understand the value of every customer. Baremetrics can be helpful in this regard as you can find the LTV of each segment by using it.
Unleashing Potential: Elevating Customer Lifetime Value
Only knowing LTV is of no use as it will be just a number. It can only do something good for your business if you delve into its details and try to improve it.
You can opt for numerous methods to boost the LTV of your business. The following section is all about some top-listed strategies and techniques to boost your company’s LTV and grow your business.
Gaining Insights: Interviewing High LTV Customers
The best way to find out what things can improve the LTV is to gather information from those customers who have the highest LTV for your SaaS company. You first need to identify the customers with a higher LTV and then conduct their interviews. You must ask them the following questions.
Where are they getting more value from your services or products?
- What are the possible usages of your products for them?
- What makes them buy your products?
- From where do they know about your products or services?
- How much have they improved after buying your products or hiring your services?
- What specific features are making them stick around your company?
Apart from that, you can ask another question as well that you think can give you insight into the reason behind high LTV.
You have to follow a few steps to conduct these interviews. The first one is to find the right customers. Here you need to apply a couple of filters. These are:
Active Customers
Make sure to consider only active customers. Reaching out to customers who have already stopped using your products can be embarrassing for you.
LTV
You have to consider high-LTV customers only. Picking those who have an LTV higher than your company’s average is a good way to go.
Once you have the list of your high LTV customers in hand, you have to reach them. Calling, texting, or mailing them is the best way to do so. Email is considered as a professional option, so you must go with it.
After contacting them, you need to persuade them to get ready for this interview. You have to send them a proposal for the interview. To make customers ready for this interview, you can offer a 10% discount or something similar.
Once the customers agree, you need to schedule the interview. Leave this thing to your clients and ask them to select the time. and date for the interview.
Now it’s time to proceed toward the last step. You have to conduct interviews and ask the aforementioned questions. After that, you will have information and you can compare it to find trends. For example, if you notice most of your high LTV customers are coming through a common channel, you can spend more on it to improve that channel and gain more customers with higher LTV.
Similarly, if most of them are staying around your company just because of a specific feature of your products, you can tend to improve that feature to grab more customers. You can also advertise more about that crowd-pulling feature.
Comparison of LTV by Cohorts
After interviews and conducting information, you will start noticing a trend. However, you cannot look at the trends for all your customers. Analyzing LTV for all customers is not a good idea as every customer is different from others.
Therefore, you need to analyze and compare LTV by cohorts. You need to estimate the LTV for each major customer segment. These lifetime values are usually various price points your SaaS company is dealing with. You can see LTV by plan levels using Biometrics.
You can notice a pretty obvious trend that the customers on the lowest payment plans usually have more. As a result, they don’t have a high LTV and don’t help your company in generating great revenues.
On the other hand, the customers on the highest payment plans do not churn often. They have a higher LTV as well. As a result, they help you in generating more revenues as well.
From this trend, you can evaluate that it’s beneficial to spend money on acquiring long-term high LTV customers.
Pricing plans are only one method to make cohorts and analyze their LTV. You can use tons of other criteria as well to make customer segments and analyze their LTV. The most common criteria may include their geographical location, time of signing up, services they are getting, products they are buying, acquisition source, and many others.
For example, you can compare and analyze the LTV of customers from Europe and Asia.
You can get nerdy there and slice data into several segments to get further insights. However, make sure that your main focus must always remain on analyzing and improving LTV.
Reduce Churn
The next practice you can focus on is to reduce churn. It is an important aspect of improving the LTV of your company.
As long as you can keep your customers sticking around you, the better it will be for your business. Firstly, you need to figure out if your churn rate is high or not. To do so, you can get help from Baremetrics to estimate churn and then compare it with other companies.
Compare oranges with oranges, therefore you need to compare the churn rate of your SaaS company with those who have LTV similar to yours.
Take note of the points where you fall in case of churn time. If churn time and LTV both are low for your company, then it’s a problem for you. You immediately need to do something about the churn to handle this situation.
Increase ARPU
When we look at the LTV formula, it is based on two things, ARPU and churn rate. We have already discussed the churn rate, so the next thing to boost LTV is to improve ARPU.
Churn is inevitable, you cannot bring it to zero. Therefore, you must focus on improving ARPU as well. To do so, you have two methods. These are:
- Raise Prices
- Expand Revenues
Raising pricing can be a touchy subject for you especially when you have just started your SaaS companies. However, it is also a fact that pricing your product too low will do nothing except decrease the value of your products and run your company.
You need to follow the SaaS pricing strategies before making any changes to the price. However, if your company is not showing any progress in the LTV despite doing good in other departments, then raising the prices is the only solution and you should go for it.
The next thing is generating more revenue. Many business owners don’t consider it as scary as raising prices. To expand revenues, you need to do several things. Three best practices in this regard are:
- Attracting more customers
- Upgrade existing customers to higher payment plans
- Cross-sell products
Set LTV Goals
If you are the kind of person who loves chasing goals then setting LTV goals can do the trick for you. It will help you in focusing all your attention on that goal and can assist you achieve more than your opponents.
Setting goals is not just about picking random numbers as your next LTV goals. You need to consider several things and do proper homework to set goals. Firstly, you need to examine your company’s current situation. You need to predict the upcoming market trends as well. Then you have to set some realistic goals that you can achieve in a fixed duration.
Chasing goals will only help you when you have set achievable goals. Baremetrics can help you in setting goals as well.
What’s LTV to Your SaaS Company?
LTV is not just a regular metric for your SaaS company. It gives you insight into the pricing and values of your products. To get benefits, you need to track as well as analyze the LTV.
If you have no idea about LTV or don’t know how to calculate or analyze it, then Baremetrics is for you. It will help you in doing all these things. Sign up now to enjoy its trial.

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