Net Promoter Scores and customer satisfaction ratings are two very important KPIs for any customer experience program since they help your business measure customer loyalty and satisfaction. However, there’s one metric that doesn’t get as much attention—customer lifetime value.
Since most SaaS and subscription-based businesses depend on recurring payments to sustain themselves, it can pay dividends to keep a close eye on lifetime value and customer retention rates.
Here’s a quick guide to help you understand customer lifetime value and learn how you can use this subscription finance metric to improve your business.
What is Customer Lifetime Value?
Customer Lifetime Value, or CLV, is a subscription metric that helps businesses measure the total revenue generated over the “lifetime” or period they’ve been an active customer.
The longer a customer continues to purchase or subscribe to a company, the larger the lifetime value becomes. As such, companies are incentivized to try and retain customers as long as possible since it directly correlates with increased revenue from the customer over time.
How to Calculate Customer Lifetime Value
Here’s one simple formula for calculating CLV:
CLV = Average recurring revenue per account * length of the partnership (lifetime)
In other words, assuming you have a customer who makes recurring payments of $30 a month for access to your software and is an active subscriber for 24 months – CLV for this customer will total out to $720.
$30 (average recurring revenue per account) * 24 months (partnership length) = $720 CLV
Using CLV to Determine Subscription Business Health
It’s commonly accepted that SaaS companies spend anywhere from five to seven times more in acquiring a new customer. With such heavy investments in customer acquisition, your business needs to make sure you’re recouping the sizeable investment you’re making.
Doubling back on the subscription customer example above, the next step is to take our analysis of CLV and juxtapose it with customer acquisition cost. In this case, comparing $720 CLV with the marketing and sales costs required to convert our customer.
Having CAC that trails lower than CLV is preferred since it suggests that there is a positive return on investment for your acquisition efforts.
How to Improve Customer Lifetime Value
1. Focus on Customer Satisfaction
According to a Microsoft study, 56% of people around the world have stopped doing businesses with a company because of a poor service experience. For software and SaaS companies, long term success will depend on your ability to keep customers engaged and show them that they are receiving incremental value from your business. Adopting this customer-centric mindset often starts as early as the onboarding process. Consider offering a higher degree of personalization when onboarding customers to your software or service to make the process as streamlined as possible. A curated collection of walkthrough guides and interactive how-to videos helps show your customers that you care about getting them onboarded as quickly as possible.
2. Implement a Dunning Management System
The last thing you’d want your customers to do is to think about opting out of your software or subscription services. Implementing automated dunning management helps alleviate the frustrations your customers may experience from having to deal with an outdated or invalid payment option.
Your customers are busy, the last thing they want to worry about is an interruption in their subscription service because their credit or debit card has expired. FastSpring’s built-in dunning features help prevent a lapse in service by proactively alerting your customers that they payment information is expiring soon so they can make the necessary preparations. This way, you can continue to delight your customers with the value of your service while also maximizing your revenue potential by preventing an interruption in your revenue stream.
3. Create a High Value Offering to Increase Customer Stickiness
While there isn’t a set recipe for creating successful products, the products that typically perform the best all do a great job of addressing customer pain points and provide an immediate solution to this problem. When building out your software or service, your company needs to carefully consider your customers’ needs and figure out a way to showcase how your solution can immediately add value to your customers. Highlighting the benefits of your product and framing it in terms of a continued partnership is one way you can encourage your customers to stay loyal to your brand.
Delighting your customers with innovative software solutions is only half the battle for long term business success. Software and SaaS companies must also focus on customer retention and maximizing customer lifetime value in order to support the future growth of their business.