Regardless of whether you are a new or experienced SaaS marketer, getting a handle on the metrics can be difficult business. As everyone in SaaS quickly learns, tracking success is much more complex than simply tabulating the sales numbers. For SaaS, the initial purchase is just one (and usually only a small) part of the overall value calculation. As customers, not purchases, are the real currency of the SaaS business, you won’t be able to benchmark your success until you can calculate the value of each customer – in terms of subscriptions renewed and expansion and marginal revenue gained – over the life of the relationship.
Fortunately, with the help of a little math, the value of the customer over the life of the subscription can be captured by the key SaaS metric customer lifetime value or LTV.
Keep reading to learn more about customer lifetime value (LTV), why it’s vital to growing your SaaS company, and how to calculate it.
What Is Customer Lifetime Value?
The name is in the title: lifetime value means the total estimated value you will receive from a customer, or subscriber, over the lifetime of their relationship with you. In other words, if a customer subscribes for a $20/month contract and stays for 20 months, their total LTV will be $20 x 20 = $400.
Why Does Customer Lifetime Value Matter?
Now we’re getting to more important questions. Customer LTV is a crucial metric for SaaS marketers to track because it allows them to calculate their return on investment Tweet. Say you spend $500 on a small social media advertising campaign, which attracts 10 new customers. In other words, you have spent $50 per new subscriber. But how do you know whether that $50 was actually a good investment?
The answer is simple. If you know your average customer’s LTV, you can begin to determine whether your marketing campaign actually resulted in a positive ROI. If 20% of your budget is marketing-related, and your average customer’s lifetime value is $400, that means you should spend less than $80 on marketing per new customer to get a positive return on investment.
Calculating Your LTV
Of course, knowing about the importance of lifetime value matters little if you don’t know how to calculate it. Generally, if you have an established SaaS solution with existing subscribers and plenty of data on them, the formula is relatively simple:
LTV = (average customer contract value per month) * (average contract duration in months)
Of course, things aren’t always that simple especially if you are a start-up. Start-ups often have trouble calculating their LTV, simply because they don’t have the data necessary for the above formula. In that case, TechCrunch provides a great breakdown of calculating expected customer lifetime value, turning this retroactive metric into a forecasting metric.
That process, of course, is a bit less accurate than its retroactive alternative. It also requires a more complicated calculation. But in exchange, you get a powerful predictive mechanism that can help you make more informed financial decisions for your SaaS solution.
Regardless of how complicated it may be to calculate, customer lifetime value is among the most crucial marketing and sales metrics for SaaS marketers to track. Calculating your true ROI means you can make more informed marketing decisions, targeting your campaigns toward those channels that offer the most success.
Are you interested in the ins and outs of marketing and selling subscription software? If so, check out our webinar on the topic. We’d love to tell you more about what it takes to succeed in the SaaS marketing world!
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