SaaS (software as a service) startups often leave a lot of money on the table when focusing on the wrong measures of unit economics.
Especially when the startup hasn’t yet achieved product/market fit (PMF) and may be ingesting some dubious advice from well-intentioned but living-in-the-past board members, average customer lifetime value (CLV) (LTV) often gets neglected.
In this blog post, you’ll learn how SaaS startup founders can measure and improve their average customer lifetime value.
Measuring Average Customer Lifetime Value in SaaS
Customer lifetime value is the total economic value that one of your ideal customers represents to your SaaS startup based on the products and services they've purchased from your company, not just initially but over the lifetime of their relationship with you.
For SaaS startups, this projection can be incredibly challenging because the initial sale is just the starting line on what hopefully is a very long and mutually beneficial relationship -- where the customer sees enough initial, intended, and extended value to become a delighted and fiercely loyal brand advocate of your company.
In addition, in a world where so many early-stage SaaS boards focus on various revenue retention and expansion revenue measures, platform utilization becomes incredibly important to maximizing lifetime value.
Suppose their company makes repeat purchases or, in a SaaS scenario, upgrades its subscription level, adds more paid users, or additional modules. Those other purchases get added to the customer's lifetime value in that case.
More broadly, if your company's business model is primarily based on recurring revenue, like a subscription, a licensed product, or a managed service, that's repeated over a specific duration (a year, three years, five years), customer lifetime value is the total value of the revenue that a particular customer generates.
How to Improve Lifetime Value
Depending on your business model, there are multiple ways to improve customer lifetime value:
- Improve the average order value or contract value
- Encourage more repeat sales or longer-duration contract value for a higher total revenue
SaaS companies, for example, usually offer many product packaging strategies to improve customer lifetime value:
- Pre-seat pricing, where each additional user added to the platform generates additional monthly recurring revenue (MRR) and annual recurring revenue (ARR)
- Different levels of the platform -- Similar to different cabin categories of airline tickets, different tiers of cars or credit cards, SaaS companies such as HubSpot, Intuit, and Salesforce have mastered the art of segmenting their pricing by feature set, bundled into typically three to five different levels.
- Per usage pricing, such as when you pay an email service provider (ESP) or marketing automation software vendor additional monthly fees for each 1,000 contacts supported in their software. Amazon Web Services (AWS) uses a similar public cloud services pricing model.
As more companies move to subscription-based models, pricing as operating expenses (OpEx) rather than capital expenses (CapEx), expect to see more small- and medium-sized businesses, way outside the realm of SaaS and IT services, emulate tech-enabled pricing models that improve the customer experience (CX) while maximizing profitability and average customer lifetime value.
What’s your favorite way to measure and improve average customer lifetime value? Let me know in the comments section below.
And if your SaaS startup or scaleup needs to improve its growth, especially around common unit economics such as CLV, also known as LTV, enroll now in our free 7-day eCourse: Go-to-Market Strategy 101 for B2B SaaS Startups and Scaleups.