Customer Lifetime Value in SaaS: 8 Powerful Strategies to Increase CLV and Maximize Revenue

Among the many valuable SaaS metrics, customer lifetime value is one of the most important. Simply put, customer lifetime value tells you how much money you can expect to make from a customer while they do business with you (or in other words - over their lifetime).

But it is more than just a number. Customer lifetime value provides a broader picture of the performance of your SaaS business - if you learn how to use it correctly.

In this in-depth article, you will learn what customer lifetime value is, how to calculate it, how to improve it, and how to use it to grow your business.

Customer lifetime value (CLTV or CLV) shows how much money an individual customer brings to your business over the course of their relationship with you. In SaaS (Software as a Service) this would be how long a customer stays with your service before they unsubscribe.

But why is it so important to know this number?

Well, there are many reasons. One is that understanding CLTV allows you to shift your focus from short-term profits to the long-term value of repeat business. Rather than relying solely on transactional thinking, CLTV encourages a more holistic approach to customer relationships. It encourages you to nurture your customer relationship, continue to deliver value and maintain an excellent relationship.

The second reason - which you will learn more about later in this article - is that it shows you how much you can spend to acquire new customers. Putting customer lifetime value in relation to customer acquisition cost (how much you spend to get a new customer) is a powerful method for forecasting your business success.

Here is something worth noting: Lifetime Value (LTV) and Customer Lifetime Value (CLTV or CLV) are often used interchangeably, but there is a significant difference - LTV provides an overall measure of the value contributed by all customers within a company. CLV, on the other hand, provides insight into the lifetime value of individual customers. So, before you start using these terms interchangeably in your team, make sure everyone knows what you are talking about.

We have already talked about why CLTV is important to know - it changes your thinking from one-off transaction-based thinking to repeat business thinking, and that it helps you work out how much you can invest in acquiring new customers.

But let's look at some more benefits.

Here are the reasons why you need to know your customer lifetime value:

A high CLV indicates that your customers like your products and that your product or service is well suited to the market. It gives you a proof of concept for your product and shows that you have understood your customers, your Personas. In addition, customer lifetime value provides valuable insights into how your offerings connect with your customers and this way helps you predict the future performance of your business.

If you quickly want to know if your company will be successful, you need to know 2 key SaaS metrics:

• Customer lifetime value
• Customer acquisition cost

Customer lifetime value tells you how much money a customer spends with you over their lifetime - you already know this. For example, if your product costs €10 per month and the average customer spends 2 months with you, your average customer lifetime value is €20.

Customer Acquisition Cost (CAC) tells you how much you have to spend to get a new customer.

And here is a ratio that will tell you pretty quick whether your company will fail or succeed. A good rule of thumb is to have a customer lifetime value to customer acquisition ratio of 3:1. This means that you are making 3 times the money on customers than it costs you to acquire them. If this ratio is closer to 1:1, that means you are not making any profit on customers. For example, when you spend €20 to get a new customers and customers only spend €20 with you. If the ratio is closer to 5:1, you can think about new ways to invest in new opportunities to get more customers and to not miss out on new marketing opportunities.

To put it simply, if you have 5 products and you see that most of your customers are only using 2 of your products and you are not making much money from the other 3, it sounds like a bummer at first. But the good news is that it tells you where to focus your marketing strategy. Improving those products and adding value will then help you increase sales.

CLV is a valuable metric for tracking and driving growth, especially in the SaaS space. With SaaS, people pay for the service on a monthly or annual basis. So, if you regularly lose a lot of customers, you will eventually go out of business. But if you track your CLV and improve it regularly, you will see real growth.

Even with so many benefits, not all companies understand the value of tracking it. This is because there are many ways to calculate the metric and it can be daunting. This is because there are many ways to calculate the metric and it can be daunting. To make it easier for you, let's look at how you can calculate customer lifetime value yourself - the easiest way.

Calculating CLV isn't a one-size-fits-all approach. There are several formulas, each with its own nuances and advantages. Some commonly used methods are

• CLV = Average revenue per customer x by customer lifetime.

• CLV = Average revenue per customer / by churn rate.

• CLV = (Average revenue per customer x by gross margin %) / by revenue churn rate.

While all of these methods work well, it is important to choose one and stick to it. Think of CLV as the ruler you use to measure customer value. Switching between rulers (different calculation methods) throughout your organization creates inconsistencies and distorts your understanding of customer value.

Also, if you're looking for investment and your CLV has improved just because you've changed the way you calculate it, investors won't be happy (understandably).

So, to cut a long story short, stick to one method.

Here are 4 parameters that shall help you find out the best method to calculate CLV:

Different methodologies work for different scenarios. Analyze the data you have and determine what works best for your industry and customer behaviour.

If you're new to CLV, start with a basic formula - there's nothing wrong with calculating CLV this way. One of the simplest is this:

Average purchase value x purchase frequency x average customer lifespan

Before deciding on a calculation method, get the opinions of the marketing, sales and finance teams on board to agree on a single method and ensure consistency in the CLV calculation across teams. Make sure you have a single point of truth, rather than multiple CLV values across teams.

Clearly outline your chosen CLV formula, data sources and calculation steps for future reference and training.

Remember, consistency in CLV calculations isn't just about numbers; it's about creating a common understanding of customer value across your organization. This single view enables you to make data-driven decisions that maximize customer lifetime value and drive business growth.

If you want to use one of the most popular methods of calculating CLTV, you'll need two additional metrics. But why even use a difficult method when there is such a simple one as described above?

So you can compare it to your competitors and industry benchmarks, simple as that. If you feel that you would rather use the easier method, be my guest.

But remember that benchmarking won't give you any insights. The additional metrics you need (which you should already be measuring in your business anyway) are:

This is the number of subscribers who have stopped doing business with you (e.g. unsubscribed) in a given period.

For example: If you had 500 subscribers last year and lost 20 during the year, your churn rate is 4%.

100%/500 customers x 20 churned customers = 4% churn rate

This is the average revenue of all your current accounts divided by the total number of users.

For example: If you have 100 accounts, and 50 of them earn €50 per user per year, and the other 50 earn €100 per user per year, then your ARPU is €75 per year.

50 accounts x €50 + 50 accounts * €100 / 100 total accounts = €75 average revenue per user per year

Now here is how you can calculate the lifetime value of a customer:
‍
CLTV = Average Revenue Per Customer / Churn Rate (€75/0.04 = €1875)

Be careful not to mix your annual subscriptions with the monthly ones. Otherwise, you might lull yourself into a false sense of security.

Would you feel the pressure to keep up when I tell you that the average CLTV in SaaS in 2023 was €3.000? This number is completely made up by the way - and let me tell you why it doesn't even matter:

While curiosity is natural, blindly chasing generic benchmarks can be a trap.

Your business is still a very personal, individual thing, with a unique customer base, so don't worry too much about what your average Google research tells you. Here's why it's more important to focus on your own CLTV journey:

Imagine comparing the CLTV of a music streaming service (with low monthly fees) with a corporate project management tool (higher investment, longer contracts). The difference is clear. Industry averages paint a broad picture that ignores the nuances of your specific business model, pricing strategy and customer segment.

Of course you can look at industry benchmarks, but at the end of the day your business is unique, so benchmarks can only tell you so much.

SaaS is constantly evolving. What was true last year may be obsolete today. Chasing outdated benchmarks can leave you behind. By tracking your own CLTV month over month, you can identify trends specific to your customers and respond accordingly. Improving CLTV is an ongoing process. You should be thinking every day about how you can deliver more value to customers, improve retention and make more money from existing and new services.

Comparing your CLTV to competitors offers interesting perspectives, but the real game changer lies within your own data. Analyzing customer behaviour, churn rates and upsell success reveals unique patterns that generic benchmarks simply can't capture. For example, if you offer a higher-priced, higher-value version of your product and see that customers love it and are happy to buy it, you not only improve your CLTV and revenue, you also learn more about what your customers are willing to pay for.

As mentioned earlier, instead of chasing benchmarks and feeling good when you hit them, create your own benchmarks. Regularly measure your customer lifetime value and constantly try to improve it with new strategies.

Strategies - you say - what strategies? I will show you 8 powerful strategies to increase your customer lifetime value. But first, make sure you have these things in place to get the most out of your efforts:

If you know who your customers are, your Personas, you can not only build a product they love and value, but also offer additional services they are happy to pay for. Upselling and cross-selling are powerful drivers for increasing CLV, so keep this in mind.

Go beyond total revenue. Monitor monthly recurring revenue (MRR), churn, upsell/cross-sell success and customer lifetime. Another pro tip is to track these metrics across different customer segments for deeper insights - but this is obviously harder to implement. However, if you can do this (and with today's solutions you can), you will gain more insight and find out how to improve this metric even further.

Don't be afraid to test different pricing models, customer engagement strategies and onboarding processes. Analyze the impact on CLTV to see what works best for your audience. If you are not willing or able to experiment and test the unknown, you will be left behind.

There's no finish line in the CLTV race. Regularly review your data, identify areas for improvement and implement changes. Remember, even small changes can have a significant impact on your long-term customer value.

When you are looking to increase revenue, it can be tempting to focus on customer acquisition, trying to get as many new customers as possible. But what most people overlook is this: Ignoring your loyal customers leaves significant profit on the table. And focusing on your existing customers gives you more opportunities. That's why customer lifetime value (CLTV) is so important. By nurturing deep relationships and continuously delivering value to your customers, you can turn one-time buyers into lifetime advocates who fuel your business growth.

But how do you do it?

Let's take a look at the 8 strategies that will help you increase your customer lifetime value.

Most businesses tend to focus on acquiring new customers. While this is important, neglecting your existing user base is essentially leaving money on the table.

Here's the key: encourage larger orders. Let me give you this example because it really shows the power of improving order values. If you go to MC Donald’s and order a burger, guess what they ask you:

"Do you want fries with that?"

They just increase your order value. They know that not everyone wants fries, otherwise those people would have ordered them in the first place. But some people do, and that is where they make money.

Back to SaaS - Think about your SaaS example. Each customer who buys only one tool/software limits its value. But what if they discovered the synergy of multiple products? In business, this is called upselling and cross-selling.

Upselling is a strategic approach that encourages existing customers to upgrade their subscription plans, for example by offering them additional features, advanced functionality or higher-level plans. The main objective is not only to increase revenue, but also to maximize customer satisfaction by providing tailored solutions that meet their growing needs. In the long term, this will help you foster stronger customer relationships, improve the user experience and ultimately drive sustainable business growth.

The terms upselling and cross-selling are often used interchangeably, but they are distinct concepts. Cross-selling involves recommending additional products or services to existing customers, while upselling encourages customers to upgrade their current subscription. Cross-selling broadens the horizon by introducing complementary solutions that enhance the overall user experience.

An example of cross-selling is Amazon's 'people also buy' box. To increase revenue, it is a good idea to show customers additional relevant offers that will broaden their engagement with your solution. Successful cross-selling not only increases revenue, but also builds customer loyalty by positioning you as a complete partner.

It is important to note, however, that you should never sell something that has no value to the customer just to increase revenue. This will damage your customer relationship. Always make sure that what you offer is valuable.

In SaaS, you probably offer different product tiers - perhaps an essential, standard and premium version of your product. To drive account growth, it's important to understand your customers' needs and preferences. Ask yourself what they really want and what features they value most.

For example, you can offer a very limited - but still valuable - version of your product for little money, while offering a more feature-rich version for more money. Then, depending on the customer segment, you can personalize the onboarding experience and guide people to the product version that is most valuable to them. Remember, it's better to get a new customer on the free version of your product than not get them at all. You can always upsell later. So, you need to make sure that your cheapest version of the product (or even your free version) is already valuable to your customers.

When users show interest in a particular feature, you can use modals to prompt them to upgrade. These messages only appear when specific actions are taken, ensuring that users aren't bombarded with irrelevant messages. This targeted approach increases the likelihood of successful upgrades.

You don't just want customers to make bigger orders - especially in SaaS - you want them to come back more often. Think about Netflix, they don't want you to buy a 2-year plan and never come back. They want you to stay longer and spend more money. In short, if existing customers keep coming back, they're likely to spend more money with your business.

To encourage customers to place more orders, you can use strategic marketing tactics. Use social media, email and other marketing channels to let your customers know about new products in a friendly way. Email marketing in particular works well if you already have a 'personal connection' with your customers. Notify them of discounts on certain items to encourage purchases and use content marketing to keep customers on your site longer.

These simple strategies will motivate customers to buy more often.

Primary onboarding sets the stage, but it's not the end of the road. That's what many companies forget. They do the initial onboarding and leave it at that. But onboarding is an ongoing process that should continue to introduce users to your product and its benefits.

Once users reach the activation point and become customers, it's crucial to ensure that they continue to find value in your product as they progress. This is where secondary onboarding comes in.

Secondary onboarding is all about highlighting additional features that are relevant to specific use cases, thereby increasing retention rates. This approach keeps customers engaged and ensures they get the most out of your product throughout their journey. But it's often easier said than done, because second onboarding isn't just about showing customers all the features you offer, it's about showing them the features that are relevant based on their use case and behaviour. This is the best way to keep customers coming back.

Even if the user is a frequent shopper who makes regular purchases, their overall value to a company is diminished if they leave after a few months. That's why it's so important to focus on customer retention. The longer customers stay, the easier it is to maintain a steady income and grow your business.

Also, a quick pro tip: as it is much cheaper to retain customers than to acquire new ones, real growth lies in customer retention, not customer acquisition.

The key to customer retention is to provide value and get people fast to the AHA moment. Invest more time in product development to improve customer satisfaction. Strengthen your customer support team to ensure existing customers get the attention they deserve. If necessary, consider adjusting your pricing to improve retention rates. As long as you keep customers coming back, you can expect their lifetime value to increase.

To reduce churn, consider rewarding customer loyalty and providing customers with educational materials and training to help them get the most out of your product. When customers feel confident using your SaaS product, they're more likely to stay engaged and loyal.

It's also important to track and analyze your customer churn rate. Investigate why customers are cancelling their subscriptions and develop hypotheses to address these issues. You can then run A/B tests to determine the most effective solutions for reducing churn. In the meantime, continue to listen to you customer feedback and meet their needs to keep them happy.

Your goal is to make your customers successful. That's how you keep them. Creating an in-app help centre or resource hub is a great way to provide self-help to your customers without requiring them to leave the app. By solving problems within the app itself, you can increase user engagement. So, enrich your help centre with various resources such as FAQs, webinars, tutorials, live chat options, documentation and links to your knowledgebase.

Making these resources easily accessible to customers will increase their satisfaction because they won't have to rely on your support team for every problem they encounter. In addition, this setup will reduce the number of support tickets, allowing your support agents to focus more on handling the complex issues.

Getting customer feedback is one of the most powerful ways to increase CLV. There are 2 main reasons for this: First, you don't develop your product or service in a black hole and risk creating something that doesn't solve a real customer pain. Instead, you take direct feedback into account and can build something that really delivers value.

And the second benefit is that when customers see that you have incorporated their feedback into the product, they become raving fans because they see that their feedback matters.

A great way to gather user feedback is through micro-surveys, such as customer satisfaction surveys or Net Promoter Score (NPS) surveys. You can prompt users to take these surveys at various points in their journey, allowing you to gather valuable feedback.

But remember - never interrupt users during their journey, but think carefully about where they are most likely to give you feedback.

When it comes to increasing your customer lifetime value, it's all about increasing the amount of money each customer spends on your product throughout their journey. One way to do this is to regularly review your pricing structure and experiment with different price points to see what resonates with your users.

Remember: Pricing is not something you do once, set and forget. You should always be experimenting to find the sweet spot. To learn how to find the best price for your product, check out my in-depth guide to SaaS pricing.

You will often find people recommending that you recalculate CLV every quarter. But as with benchmarks, a general rule can be helpful, but often isn't. So, the better way to figure out how often to reassess CLV is to ask yourself what makes sense for your business.

If you have a lot of traffic, many new subscribers, fluctuating churn, then it makes sense to recalculate more often. Just make sure you use the same method each time.

Yes, there are benchmarks, but you need to approach them with caution. Your business is unique and industry averages may not capture the nuances of your specific model, pricing strategy or customer segment. Instead of relying solely on benchmarks, focus on consistently measuring and improving your CLV based on your internal insights and customer behaviour.

Yes, you should always experiment with your pricing strategy because it's a valuable strategy for optimizing CLV. Experiments are the only way to find the sweet spot where you still have happy customers and make good money. However, be careful not to disrupt existing customer relationships. Communicating price changes transparently and monitoring customer reaction is key.

Customer lifetime value is one of the critical metrics in your business that will tell you if you are on the right track. To get an idea of your future business success, you should always compare your customer lifetime value to your customer acquisition cost - the amount it costs you to acquire a new customer. Remember: Customer acquisition is essential, but real growth comes from customer retention, not acquisition. Therefore, your goal is to implement strategic tactics to turn one-time buyers into lifelong advocates who are happy to pay and stay with your business.

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