TLDR:  

• Customer Lifetime Value (CLV) measures the profit from a customer across the lifetime of the relationship. Customer Lifetime Value is a metric for assessing the long-term health of SAAS and subscription businesses. Focus on this metric to encourage your staff to play  “the long game” with business customers.
• Maintaining a CUSTOMER LIFETIME VALUE that is at least three times the Customer Acquisition cost (CAC) is the SAAS industry target for sustainable growth.
• Customer Lifetime Value is initially negative due to the cost of acquiring a customer (CAC).  SaaS businesses should aim for a CAC payback time “Time to Break even” of less than 12-18 months to ensure financial health and scalability.
• Customer retention rates (aiming for annual churn less than 15%) and substantial gross margins (60-85%) are additional and related metrics for sustained SAAS business health.
• Targeting vertical markets with the highest CUSTOMER LIFETIME VALUE can optimize resource allocation, product roadmap prioritization, and maximize profitability.  A vertical market strategy offers the opportunity for SMEs in particular to focus on and dominate singular areas that are highly profitable and understand which markets are currently the most profitable.
• Measuring CUSTOMER LIFETIME VALUE of groups of customers based on how you acquired them, or on their persona can tell you what method of selling yields best ROI  (so-called “differential CUSTOMER LIFETIME VALUE”).
• Measuring and controlling CAC within existing systems is fundamental to accurately calculating CUSTOMER LIFETIME VALUE.  Unifying customer data in one place can help ensure that CUSTOMER LIFETIME VALUE (and CAC) data are up to date and can be reviewed in real time
• CUSTOMER LIFETIME VALUE can be grown with Customer Activation, Retention (and Expansion) Strategies –  “You can improve what you measure”

Want to learn strategies to increase Customer Lifetime Value ?  Click here to get early notice of workshop opportunities.

….

Road Trip! 

Imagine that you are driving to a city on the other side of a forest.  There is no GPS signal in the forest and you barely have enough fuel to make it through the forest.

There are 2 roads through the forest.

The first road is well-paved and marked with signs, and mile markers.

The second road, while shorter when navigated correctly, is neglected with no signposts. It has side-streets and it’s easy to take a wrong turn and get lost.

On the second road, you are petrified that you might run out of fuel going back and forth along the wrong streets and you can’t really tell whether you will or not…. till it’s too late.

What does this story have to do with B2B SAAS business health?

The milestones on the well-paved first road are like gauges for progress that assure you that you will make it through the forest before you run out of fuel.  They measure the success of each step as you progress toward your destination.

In contrast, the second road represents a business that may spin its wheels on momentum.  Without a guide, it can suddenly run out of resources and not make it to its destination.

 WHY IS CUSTOMER LIFETIME VALUE IMPORTANT?

How Can You Use Customer Lifetime Value To Guide Strategic Decisions? 

Customer Lifetime Value is a metric that measures the profit from a customer across the lifetime of the relationship. 

CUSTOMER LIFETIME VALUE a measure of the long-term health of a business. On average, do you break even before you lose a customer?

CUSTOMER LIFETIME VALUE answers key business health questions such as:

• On average, do I break even and how long does it take to break even?
• Do I have a business that scales?
• Do I have a business that investors will invest in?
• Which vertical markets are the most profitable today?
• What is the projected CUSTOMER LIFETIME VALUE of a vertical market?
• Are my customer activation, retention and expansion programs working?
• Are the costs of acquiring customers (CAC) too high?

(More on all of this in a moment)

Trends in Customer Lifetime Value and CAC can show you what marketing and sales strategies are working.

CUSTOMER LIFETIME VALUE is like the mile markers in the forest measuring how well you are progressing.  The CUSTOMER ACQUISITION COST, like the fuel gauge reading that you need to keep in check.

CustoMER LIFETIME VALUE DEFINITION

What is Customer Lifetime Value? 

Customer Lifetime Value (CLV) is a KPI that measures the total profit a business can expect from a single customer throughout the duration of their relationship.  It is one of the key metrics for a SAAS business looking to scale or be acquired.  

How healthy is my business?

What are good SAAS Metric benchmarks for an SAAS Business looking to scale or be acquired?

Exactly how much do you need to grow CUSTOMER LIFETIME VALUE? ….  How can you forecast business profitability?

Good SAAS metrics values that forecast a scalable business are (Source: SAAS Rise)

• CAC Payback time <  12-18 mo.   meaning you should aim to get your money back within just over a year
• CUSTOMER LIFETIME VALUE > 3 x CAC
• Gross ARR Retention: 85 -90%  per year  (Annual Churn < 15%)
• Net ARR Retention : 100 – 130% per year
• Gross margins: 60-85%

Key takeaway:
For a healthy SAAS company, industry guidelines are …

• Aim for an annual churn < 15% but don’t stop there
• Break even within 12 months of acquiring a customer (the sooner the better)
• CUSTOMER LIFETIME VALUE needs to be 3 times average customer acquisition cost.
• Pro-actively grow CUSTOMER LIFETIME VALUE by implementing customer activation, retention and expansion strategies.

CAN I use Customer Lifetime Value To DRIVE MARKETING?

What Is Differential Customer Lifetime Value and Why Does It Matter? 

Differential Customer Lifetime Value is  CUSTOMER LIFETIME VALUE of customers segmented by, for example, any of the following:

• How the customer was acquired
• Customer vertical market
• Customer persona
• Customer activation, retention and expansion strategy

This segmentation approach allows companies to understand which customer segments personas or acquisition channels or other CLV growth strategies yield higher returns, guiding strategic marketing investments and resource allocation.

Does a high-engagement demo video ad result in high CLV customers, compared with a standard banner ad?   Does one headline on an ad yield higher Customer Lifetime Value leads than the same ad with a different headline?   What is your most profitable customer acquisition approach? 

Measuring the  profitability of specific marketing approaches by relating it back to Customer Lifetime Value, can help you optimize sales and marketing, doubling down on what works.

Differential Customer Lifetime Value For Vertical Marketing

How Can Customer Lifetime Value Tell Me Which Vertical Markets To Focus On?

The Vertical Market trending upward or that is showing the most profits as measured by Customer Lifetime Value can tell you to double down on that market segment. 

Slice and dice average CUSTOMER LIFETIME VALUE by vertical segment and you will find out which vertical markets are the most profitable for you today.  

 

 

Slice and dice CUSTOMER LIFETIME VALUE by “most important problem solved” and “problem you need to solve next”  (a second way to vertical-ize your market is by “problem solved”)  and it will help you understand … What is the most profitable problem that you solve and that you should message to today.

This will help you  prioritize roadmap, resource allocation  and marketing effort to market to the most profitable problems and verticals

CUSTOMER LIFETIME VALUE FORMULA

How Do You Calculate Customer Lifetime Value?

 To calculate CLV of a customer:

• sum monthly profits from a customer for a total profit 
• subtract the cost of acquiring the customer and onboarding them  (CAC)
• make one final adjustment using a financial metric called “discount rate” which accounts for inflation and cost of your company loans etc. 

Here’s the CUSTOMER LIFETIME VALUE formula:

 CLV = SUM(t=1 to n) {
  Rt / (1 + d) 
} 

   minus CAC

Where:

• t = revenue period e.g. 1 month, if you charge monthly
• Rt​ = Net profit from the customer in each revenue period t (e.g. monthly)
  

• d= Discount rate (reflecting the time value of money) – The Discount Rate is usually set based on the company’s cost of capital or at an adjusted rate that reflects the risk and time value of money specific to the industry or business context.   Some CFOs call this the “Weighted Annual Cost of Service”  (WACC) and its typical value for a startup is 10-20%.
• n= Number of periods the customer is expected to remain active.  It’s the average customer lifespan based on historical data on customer churn and retention patterns. 

• CAC =  Initial cost of acquiring the customer including onboarding costs.
• CLV = customer lifetime value

Make the mistake of not including a discount rate in your CLV calculation  and your  profit projections may be too high.

The discount rate number adjusts CLV to tell you its future value in today’s terms.

• Out into the future the monthly subscription they pay is worth less because of inflation.  So, for example if they pay $297 monthly and inflation rate is 5% then you are earning 5% less 12 months out in today’s terms
• Out into the future your company is paying for loans to finance operations (typically 10-20% rate for startups) 

  ESTIMATING AVERAGE CAC SO YOU CAN CALCULATE CLV

How Can You Estimate Customer Acquisition Cost (CAC) Within Existing Systems?

Companies estimate AVERAGE Customer Acquisition Cost (CAC) by dividing the total costs of acquiring new customers by the number of customers acquired.  Care is taken to make sure that if the data about customers exists in more than one place, that it has been unified with each customer record matching, for one unified view of the customer.

The total costs are numbers your CFO rolls up and these include:

1. Marketing and Advertising Costs
2. Salaries and commissions/bonuses of Sales and Marketing Teams involved in customer acquisition.
3. Technology and Tools: Costs for CRM systems, analytics software, and other digital tools used in marketing and sales.
4. Overhead Costs: Attributable to acquisition – as office space and utilities
5. External Services: Such as fees for external sales and marketing services

GROW CUSTOMER LIFETIME VALUE WITH AI

Can AI Help to Grow Customer Lifetime Value?

AI can help help grow Customer Lifetime Value.  Examples include:

• Personalized and create segment-based marketing that better resonate with the problems that customers face. This is a massive topic – Can be used from anything to market messaging creation based on customer and user feedback to creation of presentations to summarizing data from customer conversations
• Better customer experience.  Examples include fast turnaround customer support:  AI BOTs can quickly deliver answers to common customer support questions.  Context-sensitive assistance driven by AI can also be provided within the software to make the customer more productive.
• Automated and personalized customer activation and onboarding to make more new customers successful quickly so they become long-term paying customers
• Predictive analysis of customer data to drive actions that better serve customers such as spotting trends in win-loss data so that they can be addressed, spotting trends in how the product is used and common customer support questions.

 CUSTOMER LIFETIME VALUE AND RETENTION, ACTIVATION AND EXPANSION

What Are Ways To Increase Customer Lifetime Value?

Strategies to increase Customer Lifetime Value include

• Activation, retention and expansion programs that grow MRR as well as keep customers for longer

• Keep CAC under control by testing and refining your marketing operations, showing proof of success to increase the number of users that enter your sales funnel and sign up.

• Focus on profitable vertical markets, understanding which sales, marketing and engineering projects are yielding ROI

 To find out more about how you can monetize your customers using customer activation, customer retention and customer expansion, niche marketing and vertical product marketing, and assist parts of this with AI, join my workshops. 
Click here to get on the waitlist.