ASC, CMRR, Churn Rate –the SaaS business is riddled with a legion of metrics that demand your utmost attention; however there are two essential metrics that ascertain the viability of your business: CLTV (Customer Life Time Value) and CAC (Customer Acquisition Cost). For now though, we will feast our eyes CLTV and probe into the matter.
What CLTV basically relates to is the profit you anticipate to make from a client in the time when your service will hold value. For instance, say a client subscribes for the service of your product for a period eight months. The sum of his payment during that duration will determine the life time value.
The topic of CAC (Customer Acquisition Cost) is quite insuperable in the discussion of CLTV. The basic meaning of CAC is the amount of money expend in the process of obtaining customers.
CAC < CLTV
This is the formula under which your SaaS Company must operate in order to increase proceeds.
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Transcribed to plain words, the formula means that the expenditure employed to acquiring customers should be lower than the profit you plan to generate from those customers during the time they will be using your service. Rudimentary in essence yet essential in practice, this formula is the lifeblood of tyour SaaS business’ prosperity. Failing to put this equation in to account could very well cost you your business.
The Significance of CLTV
‘Expend 5-7 times more in obtaining new customers than the amount spent in keeping existing clients’ – this is the accepted custom in the SaaS industry and this is exactly where businesses make the supreme mistake. Most SaaS companies burn up all their resources and their executive focus in the attempt to expanding their business through bringing in new customers at the cost of their earlier customers; thus ignoring to satisfy their requirements. This also means that companies are failing to curtail their churn.
Such oversights could rapidly have your business heading towards its doom. What you need to understand is that acquiring customers is a relatively easy task; retaining those customers, nevertheless, is not so easy.
There are two measures you can take so as to maintain a successful business: make reductions in the CAC or ramp up the CLTV.
Increasing your CLTV
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Formula to increasing your CLTV:
Let us first decode the mystery of the CLTV by breaking down the simple formula to calculate it.
CLTV = ARPU x Gross Margin / Churn rate
ARPU: the Average Revenue Per User
Gross Margin: the proportion between the total Revenue and the Cost of Goods Sold (COGS)
From this equation, you can learn that the growth of CLTV hinges, to a great extent, on the growth of the Average Revenue Per User (ARPU) and the Gross Margin.
Gross Margin (%) = (Revenue – COGS) / Revenue
Being resourceful in the ways of curtailing and stabilizing the Cost of Goods Sold (COGS) as your income rises, is essential to bettering your Gross Margins. The lower you keep your COGS, the higher your revenue.
Lifetime Value
You must make an effort to reduce your churn in order to increase the lifetime value. This will oblige you to enhance customer services and responsiveness.
Among the few methods to achieving this is:
- Discern the flagships of your business. During the subscription period access data on what features of your company are most appreciated by potential and existing customers. Is it discounts, free trials, or other promotional features they like? Find out what it is, because this information may very well be your BONANZA!
- Capitalize on those flagships: Once you have the data, move on to enticing customers through those features. In addition, the information could be a great guide for you in enriching your business and products.
- Employ the data to curb the churn: The data you have gathered can serve a great deal in avoiding the subscription churn. You will be able to discern the loyal clients from those that are likely to churn. For instance, clients that are fond of free trials are likely to unsubscribe from your services. Limit the churn by offering premium services most desired by customers, utilizing promotions such as free trials – within reasons of course.
Ramp up your ARPU
Increase your Average Revenue Per User by using proficient ways to lure your existing customers in to making more purchase. Utilize methods of offering discounts or coupons on upgrades. In the attempt to reduce your COGS, you must enhance your service operations in considerably improving their efficacy.
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Final Thoughts
Customer Life Time Value is therefore a metric that requires the utmost attention to guarantee profit in your SaaS business. Increasing the CLTV is also contingent upon the growth of the Average Revenue Per User (ARPU) and the Gross Margin.
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