How to Measure the Lifetime Value of SaaS Customers

Measure the Lifetime Value of SaaS Customers

Customer lifetime value (CLV) is a glimpse into your enterprise’s future. It is the sum of the profit you make from your customers over time, rather than any single sales event, and it is the most accurate method of anticipating revenue in a customer-centric, Software-as-a-Service (SaaS) environment.

If you want to calculate a customer’s true potential value to your future, then you have to calculate the customer lifetime value of a SaaS customer over many years of sustained partnership. 

Customer Lifetime Value SaaS Equation

CLV is as straightforward a mathematical equation as there is in modern SaaS enterprises. It is simply the amount of revenue obtained from a customer over the full duration of their journey with you, minus the cost of attaining and retaining their business.

In mathematical terms, it looks like this:

Customer Revenue – (Cost of Acquiring + Serving the Customer) = Customer Lifetime Value

All three of the variables within that equation, however, come with their own set of caveats.

Firstly, customer revenue is a total accumulated over time, but it is not a static number multiplied out over the number of successful renewals. You can expect annual customer revenue—or monthly, depending on your renewal timeframe—to increase over time. This is one of the great advantages of working to retain your existing customers; over time, they tend to spend more and cost less to maintain.

Secondly, the cost of acquiring a customer is a one-off event that does not get factored into an enterprise’s ongoing efforts to maintain a customer.

Finally, the cost of serving a customer can be expected to diminish over time. By better understanding a customer and more effectively delivering value over the duration of an ongoing relationship, it is possible to reduce the raw expenditure involved in maintaining their product interest.

Within a few months, a successful SaaS partnership should regain its new customer acquisition cost and begin to see an increase in CLV. This number can increase exponentially in value as you shift your focus to maintaining customers and reducing churn.

Maximizing Customer Lifetime Value in SaaS

The truth revealed by the CLV equation is that customers are more valuable to your enterprise the longer they remain active users of your product. They’ll only remain active users if they continue to derive value from your product. To maximize CLV and build your enterprise further, you must continuously deliver value to your customers at every stage of the customer journey.

Your customers don’t exist in a single condition for the duration of their time with you. They arrive without any working knowledge of your product and eventually grow to independently use it to achieve their business goals. You must be able to deliver value at each changing phase of that journey, or you’ll become irrelevant to your customers and your product’s effectiveness will fade. To do that, you need to accomplish three things:

  1. Visualize the changing customer experience in real-time
  2. Proactively deliver continuing value
  3. Anticipate and respond to potential opportunities and dangers

These factors are all achievable through goal-based, results-oriented actions you can incorporate into your daily customer workflow. 

Practical Steps to Improve CLV

Your first opportunity to improve CLV comes in the earliest days of your customer relationship. Onboarding is the crucial first step in the customer journey, and accelerating a customer’s ability to successfully integrate your product into their daily workflows is one of the best ways to inspire loyalty. The sooner a customer begins using your product, the sooner they’ll experience value and see practical ROI.

Rapid onboarding is one of the best ways to drive CLV, however, there are plenty more initiatives you can use to effectively deliver value, including:

Constant communication – Build trust with your customers by constantly engaging them. Use surveys, multimedia displays, industry discussions, personalized emails, and phone calls to become a regular fixture in their week.

Demonstrate value – Always demonstrate a clear link between your product and the business outcomes your customer is working towards.

Establish and celebrate goals – Nothing creates momentum and excitement like seeing a series of once-future goals realized. Work with your customer to establish clear, business-related targets and then celebrate the achievement of each one.

Monitor the right metrics – The customer experience is revealed in their use of the product. Using metrics that relate directly to business success will give you a real-time understanding of your customer. Such metrics might include product and feature usage, license utilization, time spent in product, NPS scores, and the number of resolved support tickets.

Segment to better serve – Grouping your customers into segments of shared characteristics lets you better target your engagements across your portfolio. You can apply the lessons learned from a single customer across an entire segment to anticipate and remove roadblocks, drive growth, and deliver additional value. 

All of these initiatives depend on your ability to gauge your customer’s evolving product experience. In order to stay in such close customer proximity, you need a quality customer success platform. 

A Customer Lifetime Value SaaS Platform

With a comprehensive customer success platform, you can use the customer experience to create impactful, goal-based engagements. If your information tells you the customer has reduced their product access recently—and you should be able to automate such movement into an early warning system—then you can quickly launch a personalized campaign to rekindle interest. Similarly, if your customer success software shows your customer has reached their license maximum, then it’s time to engage an upsell campaign and encourage them to expand.

In either case, having accurate knowledge of the customer experience lets you proactively reach out to your customer and help them better use your product. Maintaining product value is the best way to improve your CLV and ultimately create sustainable growth for both you and your customer.

Totango creates Customer Success solutions that help you better understand your customer’s experience. When you explore Spark, you’ll find a powerful data collection and analysis tool that will help you maximize your CLV by better servicing your customers. Create a free trial account today and deliver value that keeps customers coming back to your product.

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