Measure the monetary value of each customer with Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV or LTV) measures the amount of money a new customer brings in over their entire time as a customer.
Customer Lifetime Value requires you to know the lifetime of an average customer. The longer a customer does business with you, the more valuable they are.
Start with churn—the number of people who cancel their subscription in a month. For example, if you have 1,000 customers and 20 cancel each month, that is 2% monthly churn. If you invert this value, you can calculate the number of months, on average, your customers remain. 2% monthly churn = 50 months.
You will also need your Gross Margin %. This value is the percentage of profit after you’ve paid your costs. The last piece is the dollar value an average customer brings in each month.
How to calculate Customer Lifetime Value
The formula for Customer Lifetime Value is:
Lifetime Value = (Average Revenue per Account) x (1 / Logo Churn Rate) x (Gross Margin %)
How do you track SaaS LTV?
Once you’ve established the metrics for measuring Customer Lifetime Value, you can monitor this and other SaaS KPIs on a dashboard. Start tracking your LTV!
Measure The Return On Sales and Marketing Investments with the LTV:CAC Ratio
The Customer Lifetime Value to Customer Acquisition Ratio (LTV:CAC) measures the relationship between the lifetime value of a customer and the cost of acquiring that customer. This is a particularly crucial measure for subscription based companies.
Now that you have the lifetime value of a customer, you can turn your attention to calculating how much you spend acquiring a customer.
The cost of acquiring a customer is the entire sales and marketing budget divided by the number of new customers acquired in a given period. This works really well if your sales cycle is short, where your sales and marketing costs can be tied to new customers in the same period. If it’s longer, you may want to stagger your costs and new customer wins for more accuracy.
Cost to Acquire a Customer = Sales and Marketing Costs / New Customers Won
If you had total monthly sales and marketing expenses of $500K and you acquired 500 new customers in a given month, the calculation would look like this: $500,000 / 500 = $1,000 CAC
Ideally, you want to recover the cost of acquiring a customer within the first 12 months or so. In other words, if the average customer brings you $1,500 over 50 months, you should be spending about $360 to acquire customers.
An ideal LTV:CAC ratio should be 3:1. The value of a customer should be three times more than the cost of acquiring them. If the ratio is close i.e.1:1, you are spending too much. If it’s 5:1, you are spending too little. In fact, you are probably missing out on business.
These are important numbers to track. The more you understand what drives your business, the better the picture you will get of the levers you can pull to grow your business.
Monitoring SaaS KPIs on a Dashboard
Once you have established processes for measuring CLV:CAC, you’ll want to establish processes to monitor this and other SaaS KPIs. Dashboards can be critical in this regard.
Learn more about how to track your CLV:CAC on a SaaS Dashboard.