As a SaaS entrepreneur, there are countless numbers, statistics, and metrics that you need to track and calculate to assess the health of your business, but the sheer number of acronyms can be overwhelming. In this six-part series on key SaaS metrics, we’ll walk you through the most common—and helpful—metrics you need to know to successfully run and grow your SaaS business. 

As the founder of a SaaS startup, it’s not just your job to hire and train the key players on your sales and marketing team. It’s also your job to track whether or not the efforts those teams are making are truly paying off. So just how do you evaluate if the time and money you’re investing in sales and marketing is worthwhile? Sure, you can track how many leads convert to actual sales, but even that number doesn’t let you know if you’re really getting enough bang for your buck.

The customer lifetime value (CLTV) for your business is another key to unlocking the answer to the question of how effective your sales and marketing efforts are.

 

What is CLTV?

Customer lifetime value (CLTV) is the total amount of revenue, on average, you expect to earn per customer. Put another way, lifetime value is an estimate of the total subscription value of an average customer.  As the name implies, lifetime value measures the value over the entire lifetime of a customer.

 

Why CLTV is important

Knowing your CLTV is helpful for forecasting and budgeting purposes—it can give you a good sense of how much revenue you expect to generate, especially when using a bottom-up forecasting approach. Knowing this allows you to make sound business decisions, including expanding your team, or directing your marketing efforts.

CLTV does not just have value when viewed in isolation—it’s also valuable to view your CLTV relative to the average cost to acquire a new customer (CAC). Ultimately, it helps you figure out if you earn enough revenue per customer to zero out the cost of acquiring that customer.

 

How to calculate CLTV

There are several ways to calculate CLTV. One way to estimate CLTV is with this formula:

CLTV = Average Revenue Per Account (ARPA) / Customer Churn

Or you can calculate CLTV using this formula:

CLTV = Average Revenue Per Account (ARPA) × Average Customer Lifetime

For example, SaaSy Co. offers three different pricing options for its CRM software: basic, professional, and enterprise. SaaSy Co. has 100 basic customers, 250 professional customers, and 75 enterprise customers. Its average customer lifetime varies by pricing plan.

Pricing

Basic: $50/month

Professional: $100/month

Enterprise: $500/month

Average customer lifetime

Basic: 12 months

Professional: 18 months

Enterprise: 24 month

 

With this data, we can calculate the CLTV of the company’s average customer:

CLTV = [($50 × 100 × 12) + ($100 × 250 × 18) + ($500 × 75 × 24)] / 425 = $3,318

This means that, on average, SaaSy Co. can expect to generate $3,318 in revenue per customer.

 

Rule of thumb

Is there a particular value that SaaS companies should be targeting? There is no “right” answer, because it’s not your standalone CLTV that really matters but your CLTV relative to your CAC.

At a minimum, you want your CLTV to be greater than your CAC. If SaaSy Co. is spending $3,318 or more to acquire the average customer, its business is destined to fail. This may seem obvious, but especially during boom cycles seemingly promising startups can be hyper-focused on growing their customer base fast without considering the risks of spending too much on their customer acquisition efforts.

As a general rule of thumb, a good goal to shoot for is a CLTV that is 3x or more than your CAC.  This provides a buffer for unexpected variations—such as higher acquisition costs or a shorter customer lifetime—while still generating an attractive margin.

Want more metrics?

Download our guide, The 8 SaaS Metrics that Matter, to learn more about calculating metrics and using them to quantify your company’s successes for investors.

Get the guide