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. Because of this, it’s important to know how to calculate CLTV. Here’s how.
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.
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.
Want More SaaS Metrics?
This guide explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors.