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Measure the Monetary Value of Each New Customer With The Customer Lifetime Value (CLV) KPI
Customer Lifetime Value (CLV or LTV) measures the amount of money a customer brings in over the entire time they do business with a company.
To calculate Customer Lifetime Value for your company, you need some numbers. First, you need to know how long the average customer sticks with you before they cancel their service. Because of course the longer a customer sticks with you, the more valuable they are.
Start by looking at your churn rate – the number of people who cancel their subscription in any given month. If you have 1,000 customers and every month 20 of them cancel, that works out to two per cent monthly churn. By simply inverting this value ( 1 / Monthly Churn ), you can calculate how many months on average your customers will stick around. At a 2% monthly churn, that works out to 50 months.
You will also need to know your Gross Margin % (the percentage of profit that remains after you have paid your costs for the product or service), and then how much money the average customer brings in each month.
Lifetime Value = Gross Margin % X ( 1 / Monthly Churn ) X Avg. Monthly Subscription Revenue per Customer
So, for example, if you had a gross margin of 75% and monthly customer churn of 2%, and each customer spent an average of $40 with you every month, the calculation would look like this: 75% X ( 1 / 2% ) X $40 = $1,500 LTV
Monitoring SaaS KPIs on a Dashboard
Once you have established metrics for measuring Customer Lifetime Value (CLV), 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 Customer Lifetime Value (CLTV or LTV) on a SaaS Dashboard.