For B2B SaaS business owners, knowing that customers are valuable isn’t enough. You also need to determine the value customers generate during the time they are subscribed to your product or service.
This will help you determine the amount of resources to dedicate to acquiring new customers, retaining existing ones, and also expanding your customer base. Consider this—for most conventional businesses, their relationships with customers end when the transaction is complete. For B2B SaaS, customer relationships can last many years.
So how do you determine the value a customer delivers to your company?
Granted, there are a couple of KPIs for SaaS businesses such as annual recurring revenue, retention rates, and churn rates. However, the most powerful KPI to evaluate the total amount of revenue you can generate from all your customers within a given period is LTV. By tracking this metric, you will be able to launch a solid SaaS marketing strategy to acquire new users and retain the existing ones.
In this article, I’ll teach you how to calculate LTV for your B2B SaaS and how to improve this metric.
Let’s get started.
What is B2B SaaS LTV?
LTV also referred to as CLV or CLTV is an acronym for lifetime value.
This key metric is used to measure the total worth of a customer over the entire period of using your SaaS product or service.
For instance, if a customer subscribes to a monthly plan of $100 for your SaaS product and continues to use your product for a period of 2 years before cancelling their subscription, the customer LTV would be $100 × 24(months) = $2,400.
What’s The Importance of Customer LTV?
Calculating customer LTV for your B2B SaaS can be rewarding in many ways.
For instance, it will enable you to launch a solid strategy to acquire and retain customers and boost profitability.
Here are more benefits of calculating LTV for your B2B SaaS:
- It helps to determine the viability of your B2B SaaS
- It provides useful insights into customer acquisition and retention spending
- It provides valuable data that can be leveraged to enhance marketing efforts and inform decision-making
- It helps to attain consistent growth
How to Calculate LTV
Subscription management for SaaS businesses encompasses a lot of efforts and one of them is evaluating LTV.
There are three ways to calculate customer LTV for SaaS businesses.
Each method uses different variables so you need to gather all the required data before you start your calculations.
Here is how to calculate LTV:
Method 1
In this case, if a customer spends $100 per month, on average, on your SaaS product over a period of 12 months, then the LTV is $100 × 12 = $1,200.
Method 2
Churn rate = Churned customers/Total initial customers
In this method, if you had 1,000 subscribers in the previous year and 200 canceled their subscriptions then the churn rate is 0.2%.
In this case, if the average revenue per customer is $100 then LTV will be $100/0.2%= $500.
Method 3
To get the Average Revenue Per Customer, you need to divide the monthly recurring revenue by the total number of subscribed accounts.
For the Gross Margin, subtract the total cost of goods from the total revenue.
Then for Revenue Churn Rate, subtract upsells from revenue lost in a specific period and divide the amount by the revenue at the beginning of that period.
This formula represents LTV in gross profit terms instead of revenue basis.
Thus, if the average revenue per customer is $100, the gross margin is 15%, and the revenue churn rate is 10%, then LTV is ($100 × 0.15)/0.10 = $150.
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How to Increase LTV
Now that you have calculated LTV for your SaaS company and feel that there is a great need for improvements, where should you start?
Well, there are many techniques you can leverage to increase customer LTV for your B2B SaaS.
What are the techniques to Increase the LTV?
Here are the 4 most effective techniques that help increase LTV:
1. Conduct Some Market Research
Here, you need to start by understanding your customers in terms of the value your product offers to them.
You can reach out to customers with a higher LTV to know what drove them to sign up, how they use your product, etc.
2. Enhance Your Onboarding Process
This is probably the earliest opportunity to increase LTV. Ensure customers see the value in your product by streamlining and shortening the onboarding process.
During the onboarding process leverage the following techniques:
- Create instructional videos, guided product tours, etc to show your customers how to get the most out of your product.
- Keep the process simple, easy, and fast
- Personalize the process
- Perform A/B testing to optimize the process
3. Improve Customer Relationships And Loyalty
Building solid customer relationships is crucial for the long-term success of your company.
Ensure your customers feel valued and connect with them constantly. Seek feedback to know what needs to be improved in your product.
For example, Pharmaceutical company build strong relationships with the medical professionals that help them to boost digital HCP engagement for their product and services.
Medical professionals mention and recommended associated pharmaceutical brands in their posts on the digital HCP platforms.
In this ways, pharma brands can get good return by building good relationships and loyalty with medical professionals.
4. Strive to Reduce Churn Rates
It goes without saying, the higher the churn rate, the lower the LTV. Thus, you should aim to reduce churn rates as much as you can.
Here is how to reduce churn rates:
- Use online tools to determine the status of your churn rates for the industry
- Send churning customers short surveys to know why they are canceling their subscriptions.
- Choose an subscription management software to streamline your subscription management process and enhance and improve your revenue potential. Attrock prepared a list of best SM software for your business.
- Determine when your customers are churning.
- Ensure your website is user-friendly to enhance your customers’ online experience
Conclusion
Calculating customer LTV for your B2B SaaS is essential for your business’s long-term success and profitability. It can help you determine where you need to improve which can help you define solid strategies to accomplish this. Overall, you should leverage data and insights from customers to measure LTV and improve it accordingly.
