How to Calculate and Improve Customer Lifetime Value
A graph of customer lifetime value
02 Oct

One of the most important metrics for SaaS companies is your customer lifetime value. Understanding this metric can help you strategize your business growth and nurture high-opportunity customers. Here’s everything you need to know about how to calculate CLV  and what your numbers mean.

What Is Customer Lifetime Value?

Customer lifetime value (CLV) is how much you earn from a single customer over the length of the relationship. It can be used to estimate the average value of a customer relationship and to predict the value of future customer relationships. For SaaS companies, CLV is a useful metric to understand the quality of both your solution and your customer experience.

How to Calculate CLV

There are a number of ways to calculate CLV, depending on what you sell, how much data you have, and how accurate you need your calculation to be.

In the case of a SaaS company, the simplest way to calculate CLV is to find your average monthly customer value and multiply it by the average lifespan of a customer in months. For example, the CLV of a software company with an average monthly value of $2250 and an average lifespan of 2 years (24 months) would be $54,000.

What Does Customer Lifetime Value Tell Us?

CLV helps companies make better business development, sales and marketing, and retention decisions. It helps quantify the amount of time and money they should invest in gaining or renewing a customer. And, it can be used to forecast profit by comparing CLV to average customer acquisition cost.

Segmented CLV

Finding your overall CLV is helpful for understanding your overall profitability, but it can provide so much more information with just a few extra calculations. One of the most helpful ways to break down CLV is by customer segment. This might include looking at CLV by software pricing tier, industry, or company size.

You can calculate average CLV based on these segments to get insights on what your best customers have in common as well as what increases or decreases CLV for your particular business.

How Can CLV Improve Customer Retention?

Knowing and understanding your CLV (especially by segment) can help you improve your overall customer retention and ideally, profit. With an accurate sense of your CLV, you can identify:

  • Shared characteristics of your highest and lowest value customers
  • Common drop-off points
  • Key customers and accounts
  • Best- and worst-performing sales and marketing tactics

These commonalities can help you make strategic changes to improve your customer retention and avoid overinvesting in new business.

Get Insights on Cross-Selling & Upselling Opportunities

By knowing your customer lifetime value, you can identify customers who have a longer than average lifespan but a lower than average value. These customers offer prime opportunities for upselling, cross-selling, and overall account growth.

Reduce or Avoid Customer Acquisition Costs

Knowing your CLV can also help you reduce or altogether avoid high customer acquisition costs. Since you know the expected value of a customer, you can set an acquisition budget to prevent overspending when signing a new customer and ensure long-term profit.

You can also identify customers who are similar or dissimilar from your ideal (high CLV) customers early on. Maybe your data shows that companies of over 500 people have a high monthly value but a short customer lifespan, causing a low CLV. Looking at the data qualitatively, you see that these customers often up outgrowing your offering faster than you can add the features they need, so they may not be worth extensive (and expensive) pursuit.

This knowledge enables you to put more time into your strongest relationships, provide additional training, take in critical feedback from key customers, and more.

Increase Customer Value

Once you know your average CLV, you can see if it’s enough to sustain your company and turn profit. You can also narrow in on key accounts to grow and explore common traits of successful customers to take on new business intentionally.

And, CLV can even help you make strategic company decisions. When monthly customer value and customer lifespan are both high, an increased CLV can let you know it’s time to raise prices or add new features.

RevSetter provides a deeper understanding of your customer lifetime value, so you can take control of your customer retention and success. See how with Customer Data and Insights from RevSetter.

Check out our other blog posts

The New Way to CS

Listen here on: Apple Podcast Spotify Google Customer Success has evolved in recent years - from focusing on old-school, vanity metrics and being seen as a support or services function to focusing on value-creating, ROI-driven metrics and being seen as a revenue...

Understanding the Rule of 40: How Net Revenue Retention (NRR) Drives Success in B2B Tech

The "Rule of 40" is a common benchmark used by many B2B tech companies to measure their success. The Rule of 40 is the sum of a company's growth rate and profit margin, and a result of 40 or higher is considered a good indicator of a healthy and sustainable business....

What Is CSM Software? A Comprehensive Guide to Customer Success Platforms

Customer success management software (commonly known as CSM software or Customer Success Platforms (CSP)) is an immensely powerful tool for businesses of all sizes. It helps companies focus on the satisfaction of their current customer portfolio to grow their business...

The Importance of Retention and Customer Success for SaaS companies

Net Revenue Retention (NRR) is a key metric for Software-as-a-Service (SAAS) companies as it measures the ability of a company to retain and grow its customer base over time. In the B2B (business-to-business) space, the importance of NRR cannot be overstated as it is...

Customer Intelligence is the key to unlocking revenue growth!

I had the pleasure of interviewing Mary Poppen, Chief Business and Customer Officer at recently. We discussed all things “Customer” and how to drive amazing customer experiences at scale while growing Net Revenue Retention! Mary Poppen is the Chief Business...

Customer Success goes beyond a function — it is a mindset

I had the pleasure of interviewing Stephanie Hamilton, a gregarious woman who has dedicated the past 15+ years to the Hospitality Industry. Stephanie shared her own personal thoughts, opinions and ideas with us. From multiple positions at hotels to post-sales...

Customer Success — one of the greatest revenue engines ever

I had the pleasure of interviewing Ariel Benzakein. Ariel has over 25 years of experience leading high performing teams at software companies, currently in SaaS, but going back to the on-premise software days. Ariel began his career in software sales, but spent the...

Customer Success — the art of putting value & people first

I had the pleasure of interviewing Nir Kalish, Director of Customer Success at StrongDM, CS coacher, and CS advisor. Nir has 15+ years of experience building QA, Solution Engineering, and Customer Success groups from the ground up in early-stage startups. He is a...

Value is all about the outcome, not just the journey.
(Although he loves customer journey’s too!)

I had the pleasure of interviewing Michael Boyd, a long-time customer success leader who has just stepped into a new challenge as the VP of Customer Success at Vanta, the leading automated security and compliance platform that helps companies continually monitor...

Axonius’ James Levine sees an exciting future for the Customer Success space

I had the pleasure of interviewing James Levine who brings with him over 21 years of experience in the Customer Success space including a wealth of Business Intelligence, business strategy, analytics and SaaS expertise. James joined Axonius in February 2021 to form...