How to calculate Lifetime Value in SaaS. Quick guide

SaaS companies must maintain rigorous monitoring of metrics that give them an overview of the financial status of their products. In particular, Lifetime Value SaaS is a key indicator to evaluate our Saas, from acquisition to retention of a customer.

If you are interested in knowing more about Lifetime Value, how to calculate it and its importance, stay tuned to this article to learn about the details of this valuable metric for SaaS companies.

What is Lifetime Value in a SaaS?

The SaaS Lifetime Value is a metric that predicts how much money a user will spend during their time as a customer of the company. Thanks to this meter, companies can accurately quantify the value a customer has for them.

Generally speaking, it is more profitable for companies to build customer loyalty than to acquire a new one, which translates into a first-order importance for this metric that seeks to provide insight into the value of customer loyalty.

On the other hand, it is convenient to clarify that Lifetime Value is different from Net Promoter Score because the latter measures customer loyalty and the Customer Satisfaction Score measures customer satisfaction, both of which can be understood as the measurement of an intangible customer trait. Meanwhile, the LTV is in charge of measuring a tangible and monetary aspect of customers.

How to calculate LTV in a SaaS?

Lifetime Value is a simple metric to calculate. However, it is important to be consistent and coherent with the data used to get a result that is close to reality.

The LTV result is obtained after multiplying the Average Recurring Per Account by the average lifetime of a customer times the Gross Margin. As you can see, the Lifetime Value is a metric that has other SaaS metrics as input data, in that sense, it is extremely important to be careful with the corresponding calculations.

Thus, it is convenient to review in detail how each input data is calculated, its meaning and what it represents for the analysis of the company.

Calculation of Average Recurring Per Account

It is the average payment of users or customers over a period of time. For this, it is necessary to divide the total revenue during a time window by the total number of customers corresponding to the same time interval.

Calculation of the Average Customer Lifetime

The Average Customer Lifetime is the inverse of the Churn Rate, i.e., just divide one by the Churn Rate to get its inverse which represents the Average Customer Lifetime. The Churn Rate is calculated by dividing the number of customers who have left the company by the total number of customers at the beginning of the corresponding period of time.

Calculation of the Gross Margin

The Gross Margin refers to the gross profit left by each transaction made by a customer. Of course, it is a variable percentage between different SaaS companies as it depends on their business model and the profitability it is capable of delivering.

It is common for a company to have a low Gross Margin at the beginning of its life cycle. However, as time goes on, SaaS companies often reach up to a Gross Margin of 75%, which translates to a fairly high contribution when compared to companies in other industries.

The significance of the result obtained

The Lifetime Value is a revealing metric for SaaS companies. Thanks to this indicator, it is possible to know the relationship between costs and current revenue, without leaving aside how long you need to recover the investment of customer acquisition.

It´s important to be consistent when calculating each input data to be used to obtain the Lifetime Value, as it is a metric derived from other metrics calculated previously, achieving reliable results depends on thoroughness throughout the process.

Why Lifetime Value is important for your company

Lifetime Value gives you an overview of your company’s organic and sustainable growth, and as a metric focused on long-term customer relationships, it is able to project your growth with reliable data.

Not only that, thanks to Lifetime Value SaaS, it is possible to know the current profitability of your business and the time you need to recover the money invested in the acquisition of each customer. In this way, you can diagnose if you are having problems in customer loyalty and how you can optimize this area of your business.

In any case, a higher Lifetime Value SaaS means more loyal customers to your products, i.e. customers who are satisfied with the service received. In short, a high Lifetime Value SaaS is indicative of a growth-minded and financially healthy business.

How to improve Lifetime Value?

There are several ways to improve the Lifetime Value your company is currently experiencing. Here are some helpful tips on how to do so.

Customer loyalty

Increasing customer retention is one of the most efficient ways to improve Lifetime Value. To do this, it is advisable to generate loyalty-oriented marketing strategies with the intention of improving the customer experience to generate a closer connection with the brand.

In that sense, you should always listen to customers to implement changes that address their needs, and customer experience-oriented staff education is key in the process.

Reward the best customers

One way to approach customers is to reward them individually or in selected groups. You should evaluate the requirements for customers to qualify for special rewards such as discounts, promotions, coupons, or gifts.

Talk to your customers

Having a loyal community on social networks translates into more sales and a better Lifetime Value. In that sense, it is advisable that you maintain frequent activity on social networks, interact with your community, answer questions and be empathetic with your customers or potential customers because that aspect is part of their experience as the brand.

Learn from your best customers

You should start by identifying which customers have a higher lifetime value than the average you manage and learn from them. In particular, you’ll want to learn how they use your product, why they find it valuable, and what you could do to improve it.

For this process you can schedule interviews with customers and reward them for the time invested in giving you that interview.

Analyze lifetime value with customer segmentation

Seeing the big picture works on many occasions, however, sometimes a closer look at the metrics is desirable to get a better interpretation. Therefore, it is ideal to segment customers and review their lifetime value to determine what improvements to implement.

You can use our free SaaS data analysis tool to calculate SaaS Lifetime Value and other metrics for free.