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# Customer Lifetime Value (LTV): How to Calculate and Increase It?

As a SaaS company, you have to calculate numerous metrics. Among all,

is arguably the most mysterious one. It’s difficult to calculate, and once you have done so, you have no idea what to do with it.

Hopefully, in today’s post, we can demystify this metric and offer you a deep insight. It will help you use this metric within your company in the best possible way.

Start by knowing what LTV is. It is the expected amount that a client or subscriber will spend to buy your services or products in the whole relationship. That’s why it’s called a lifetime value.

Knowing this metric can help you get out of transaction-based thinking and make you focus on the long-term value of the recurrence business.

Example: You are selling your service for \$200 per month. A customer stays with you for a whole year, so the LTV will be \$2400.

## How to Calculate LTV- The Nitty Gritty Details

The aforementioned example explains the LTV calculation for a single customer. However obviously, it is not going to help you run your business (since we believe you have more than 1 customer)

Two additional metrics are required to measure LTV. These are:

1. Churn Rate
2. Average Revenue Per User (ARPU)

First, check out some details about them.

1. Churn Rate

Example: Suppose, you had 100 subscribers last year. 5 of them left within the time period. So the churn rate will be 5%.

1. Average Revenue Per User (ARPU)

ARPU is the average revenue you earned from all your active accounts. You can represent or calculate it by dividing MRR by total users i.e. MRR/Total Users

Example: Let’s say you have 100 active accounts. 50 of them made you \$50 per year and the other 50 made \$100. So, your ARPU will be \$75.

Now, you can use the following format to calculate the LTV.

### LTV Formula

LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime

You can estimate LTV by using the churn rate as well. It can be more convenient as the Churn rate is the number you always have.

LTV = ARPU / User Churn

LTV and churn rate have an inverse relationship. If one is higher the other will be lower and vice versa. Both churn and LTV are equally important so you have to pay attention to both these metrics.

You got lucky there as you don’t have to calculate LTV manually. SaaS analytical tools like Baremetrics can help you in estimating LTV.

## Variations in Churn

It often becomes messy to calculate your company’s churn rate. For example, if you think of a cohort (the group of subscribers that joined in a given time i.e. all the clients you gained in May) in a given period, there are chances of a cliff soon after the completion of the first month or even earlier.

To deal with this churn variation, we can multiply the results with a discount rate (discounting for expected cash flow losses in the future). You can go with a discount rate of 0.75 to get a conservative estimate.

((ARPU x Profit Per User)/Churn rate) x .75

## Sample Size

The sample size is also very significant but it’s unfortunate that the scientific method is often disregarded in business practices.

If you try to count very low users in a metric, then your data will not be scientifically valid. The following are some guidelines for sample size.

Less than 100 users: More than 50% of user data needs to be counted. Go with 100% for better results.

1,000 to 10,000 Users: 10% of user data is required to be calculated. For example, if you have 5000 users, then 500 must be included in the calculations.

More Than a Million Users: Only 1% of user data must be counted. Let’s say you have 2,000,000 users. You have to count the data of at least 20000 for valid results.

## Relation Between CAC and LTV

CAC stands for the customer acquisition cost. It is the amount you spend to grab a new customer. LTV can derive the amount you spend to acquire a new customer. For example, if you spend \$100 to acquire a customer for a \$500 contract, then you are earning \$400.

A higher LTV and low CAC value means you are generating good revenues. Once you know the lifetime value of a customer, you can get a better idea of how much you can spend to acquire that customer.

Try to keep the LTV/CAC ratio greater than 3. If it’s 3 or even lower, it means you are spending a lot to acquire customers.

As mentioned earlier, the relationship between LTV and churn is inverse. Your LTV can deviate from the expected value because of churn, a malicious word for every SaaS company owner.

You may be surprised to know but it’s a fact that the subscribers with the lowest-priced plans churn the most. So your LTV for this plan will be more despondent than other plans.

Remember! We told you that LTV derives how much you can spend to acquire a new customer. For example, if the average CAC is \$200, then it’s completely senseless to spend this amount on a customer with an LTV of \$100. Knowing LTV for each customer segment is mandatory for you.

Baremetrics offers SaaS analytics and insights in an unorthodox way soon after connecting your account.

## Methods to Improve LTV

Knowing the average LTV for your customers is a good thing. But only having data in the form of graphs or tables is not going to help you unless you utilize it.

So next, we are going to show you some methods to improve your LTV.

### Interview Your Clients With The Highest LTV

When you aim to improve your LTV, the best point to start from is talking with your already existing subscribers or users.

You must interview the customers with an LTV higher than your average. Once you manage to get their time for the interview, ask them the following questions.

• How are your products or services helping them?

You can ask them about anything else as well that you observe is the reason behind these high LTV customers sticking around you.

You cannot just call a customer with a higher LTV and conduct this interview. You need to follow a few steps to figure out such customers and get them ready for an interview.

The first step is to find out the average LTV. If you are using Baremetrics, you can easily note the average LTV from onboard.

The next step is to filter your customers. Ideally, you need to set only a couple of filters.

1. Active Members : You have to talk to active members as reaching out to those who have already left can get awkward.
1. LTV: You have to apply this to filter out only those customers who have LTV higher than your average.

After applying these filters, you will have a list of your active members or subscribers with high LTV.

Now the next step is to reach out using email and persuade them to an interview. You can offer them something to get them to agree to an interview. It will lead more people to opt-in for an interview.

You must always insert a link in the mail using Calendly or Doodle. This link will be used by your customer or user to schedule a call. It makes things super easy for you and your subscribers.

After that, you can conduct interviews and arranged the data on a spreadsheet. Based on this data, you can find the right points in your products or services to invest your time and money to get more customers.

### Comparing LTV With Customer Segment

You started noticing a trend after seeing the information you get from all your high LTV customers. However, to make it more actionable, you can split all the customers into smaller groups to figure out numerous other trends.

You have to do so as all customers are not the same. You need to calculate the LTV value for each major segment. For SaaS companies, it is usually different prices you offer for subscriptions.

You can use Baremetrics to visualize your LTV by plan level.

It is a common trend in SaaS companies that customers with the lowest LTV churn more and generate less revenue for you. On the other hand, high LTV customers stick around for a longer time and help you generate great revenues.

Therefore, you need to find mid-large-sized customers to earn more revenue.

A pricing plan is the only way to split your customers into segments. Biometrics can help you put them into different segments based on location, acquisition source, and tons of other criteria. For example, you can compare the LTV of your European and Asian customers.

Not get nerdy after seeing the data split into various segments. Your main focus should always remain to identify the segment with the highest LTV and try to grab more customers like them.

### Ameliorate Churn Rate

The LTV formula is a function of two things only. These are

• Money customers spend with you
• The time they stay with you

So, the longer you keep your customers paying you, the more profitable it will be for you. To do so, we need to look at the churn time of users to find out how long they stick around you before canceling the subscription.

Firstly you need to know whether your company’s churn rate is higher or not. To do so, you can compare it with other similar companies. can do so for you by comparing the benchmarks of your company with other firms that have almost similar ARPU as you.

If the user churn rate is low and LTV is also low, then you need to worry about it and try to reduce your churn rate.

### Improves ARPU

Let’s talk about the second part of the LTV formula, the average revenue per user or ARPU.

Churn is inevitable, you cannot rely only on reducing its percentage to improve LTV. You need to increase ARPU as well. Two effective methods to improve ARPU are:

1. Raising Prices
2. Expanding Revenues

Raising prices can be a tough decision for you especially if you are currently setting up your business. But it’s a matter of fact that pricing your product too low can comfortably stunt the growth.

You need to do proper homework before making any drastic changes to your SaaS process. If your company has been at a standstill and LTV is not improving, then it’s worth changing the pricing strategy.

The other method is relatively simple. You have to try to generate more revenue from your existing customers. You can do so by:

• Cross-selling

## Setting LTV Goals

I know the widely cited Harvard study suggesting that people who set goals have 10 times more chances to succeed than those who don’t do so. Let’s temporarily set that aside for the sake of discussion.

If you love to put your efforts toward achieving something, then setting goals can be very helpful and motivational for you. Setting goals leads you to develop some robust strategies to achieve them. So, it’s more like planting a seed. You can set goals by using Baremetrics as well.

When you set goals, always do so logically. Instead of picking any random number, you must put logic behind it. Going through your records can help you a lot in this regard.