Companies track a set of performance metrics that are standard to their industries or important for measuring specific aspects of their business. One metric might be useful in demonstrating business health in a particular industry, while serving no purpose in another. But across most sectors and business stages, customer lifetime value (CLV) is a key metric that indicates whether a business is succeeding with its customers—and where it has room for improvement.

In the world of SaaS, CLV represents the current state of revenue optimization and the potential long-term success of a business. Whether you're at a small startup or a well-established company, understanding and maximizing CLV can create a sustainable, profitable customer base and provide you with valuable insights and actionable strategies for driving business growth.

Below, we’ll explain what SaaS businesses should know about how to calculate and increase CLV, the most common methods of calculating CLV, and tactics for improving customer retention, upselling and cross-selling, and acquiring new customers.

What’s in this article?

• What is customer lifetime value?
  
• Why customer lifetime value is important for businesses
  
• How to calculate customer lifetime value
  
• How is customer lifetime value measured?
  
• What factors impact customer lifetime value?
  
• Customer lifetime value examples
  
• How Stripe can help
  

What is customer lifetime value?

Customer lifetime value (usually expressed as CLV) is a metric that helps predict how much net profit a customer will generate over the entire span of their relationship with a business. It evaluates the potential value of a customer to a business, and informs strategic, tactical decision-making by helping businesses identify and prioritize their most valuable customers and allocate resources accordingly.

Why customer lifetime value is important for businesses

CLV is important for SaaS businesses, because it helps them understand the long-term value of each subscription customer as well as the cost of acquiring and retaining those customers. This enables businesses to make informed decisions about sales, marketing, and product development. There are very few aspects of running a SaaS business that aren’t impacted by CLV.

CLV is also a key metric for evaluating the overall health of the business and setting goals for growth. Additionally, having a good understanding of CLV can inform pricing and customer engagement strategies, helping SaaS businesses maximize the value they extract from each customer over time. CLV provides a holistic view of customer value and can help businesses make data-driven decisions to increase revenue and profitability.

Here are a few specific areas where CLV can impact business strategy:

• Prioritizing customers
  CLV helps businesses identify their most valuable customers and prioritize them accordingly. This enables businesses to make informed choices about how much to focus on retaining and growing their highest-value customer segments vs. boosting their efforts with lagging cohorts.

• Marketing and sales strategy
  CLV can inform the development of marketing and sales strategies. For example, businesses might use CLV to identify the most cost-effective channels for acquiring new customers, the most effective methods for retaining existing customers, and where inefficiencies exist in the marketing and sales funnels.

• Budgeting and forecasting
  Businesses can use CLV to influence budgeting and forecasting across the business, predict future revenue streams, and make data-driven choices about the most advantageous places to invest their resources.

• Identifying cross-selling and upselling opportunities
  CLV demonstrates how efficiently a business acquires and retains customers, but it also uncovers opportunities to increase revenue from existing customers through cross-selling and upselling.

• Long-term planning
  By estimating future revenue streams and the growth potential for different customer segments, CLV helps businesses with long-term planning. CLV can also indicate the potential of untapped market segments.

How to calculate customer lifetime value

CLV is typically calculated by multiplying the value generated per customer by the length of their lifespan as a customer. Some industries measure customer lifespan in months, others in years. For example, automotive companies might measure CLV in years, since few customers purchase more than one vehicle in any given year, and customer retention efforts are focused on driving repeat purchases over a timeline that extends for many years.

There are different ways to calculate CLV, but one simple method is:

CLV = (Average Value of a Transaction) x (Average Number of Transactions) x (Customer Lifespan)

For example, if a customer spends an average of $100 per purchase and makes a purchase once every six months, with a retention time of five years, the CLV would be:

CLV = ($100) x (2 purchases per year) x (5 years) = $1,000

Most businesses add other metrics to this simple equation to obtain a more complete picture of efficiency and profitability. These additional metrics might include customer acquisition cost, gross margin, and customer referrals.

How is customer lifetime value measured?

Since CLV is influenced by constantly evolving conditions, businesses should monitor it continuously. There’s more than one way to calculate CLV, and depending on the industry and markets businesses operate in, they might consider several different CLV formulas to gain more nuanced insights into their current and future financial health.

CLV can be measured by using the following methods:

• Historical CLV
  This method uses past sales data to calculate the average revenue generated per customer over a certain period of time.

• Cohort analysis
  This method groups customers by the time period in which they made their first purchase (e.g., by month or quarter). Then the CLV is calculated for each cohort based on its revenue and retention over time. This method can identify patterns in customer behavior and compare the CLV of different customer segments.

• Predictive CLV
  This method uses statistical models to predict the future CLV of a customer based on their past behavior and demographics. This method can identify high-value customers, allowing businesses to make data-informed decisions about the best use of their resources.

• Retention-based CLV
  This method is based on the number of repeat purchases, average purchase value, and customer retention rate. The formula for this method is:

CLV = (Average Revenue per Transaction) * (Number of Repeat Transactions) * (Retention Rate)

• RFM analysis
  This method considers three factors:

  • Recency: When was the last purchase made?
    
  • Frequency: How often do they purchase?
    
  • Monetary value: How much do they spend?
    

Businesses can calculate CLV using any of these methods, for their customers as a whole or for specific cohorts. To better understand prospective profitability, they can compare CLV to customer acquisition cost (CAC). One of the key indicators of profitability is when CAC is lower than CLV.

What factors impact customer lifetime value?

Customer lifetime value isn’t a static number. Instead, it’s the result of several moving parts within a business ecosystem. To improve CLV, businesses must understand the primary levers that drive it:

• Average order value (AOV)
  The amount of money a customer spends each time they place an order. Increasing AOV through upselling, cross-selling, or bundling is one of the fastest ways to boost CLV.

• Purchase frequency
  How often a customer returns to buy from you within a specific timeframe. High-frequency customers are significantly more valuable than shoppers who only purchase once.

• Customer lifespan
  The duration of the relationship between the customer and your brand. For subscription models, this is defined by the time between sign-up and cancellation. For retail, it’s the time between the first and last purchase.

• Churn rate
  The percentage of customers who stop doing business with you over a given period. A crucial factor, even a small reduction in churn can lead to a massive compounding increase in lifetime value.

• Gross margin
  CLV is most accurate when it accounts for the costs of goods sold (COGS). If your margins are thin, a high-revenue customer may actually have a lower CLV than a lower-revenue customer with higher margins.

• Customer acquisition cost (CAC)
  While not a direct component of the CLV calculation itself, the relationship between CLV and CAC determines your business’s overall health and scalability.

How to increase customer lifetime value

Creating and executing a strategy to increase CLV relies on a clear understanding of financial performance. While many businesses focus on acquisition, the most sustainable growth comes from optimizing the value of the customers you already have. There are several ways businesses can increase CLV, and these strategies can be broken into two primary categories:

How to increase customer value (money spent)

These strategies focus on the value part of the CLV equation, maximizing the revenue generated during every interaction. Strategies include:

• Invest more in upselling and cross-selling efforts
  One way to increase CLV is to convince customers to spend more. For most businesses, this means cross-selling and upselling. Businesses can increase the average value of a sale through strategic merchandising during the checkout experience, bundling popular products together, offering complementary products or services to existing customers when they make a purchase, or incentivizing customers to move into a higher tier of product functionality or membership access.

• Concentrate on subscription-based models
  Subscription-based models can increase CLV by providing a recurring revenue stream. For example, a company that sells a product in a monthly subscription box will have a higher CLV than a company that sells the product only one time. Similarly, the SaaS business model is based on the idea that CLV increases when customers pay a small recurring fee for continued access to a software product, rather than paying a higher one-time price to own it outright.

• Improve customer acquisition cost
  By lowering the cost of acquiring new customers, businesses can increase the overall profitability of their customer base, leading to a higher CLV. Understanding which acquisition channels are operating the most efficiently can tell businesses where to focus as they grow. Similarly, knowing which acquisition channels and tactics are underperforming can be instructive, guiding businesses to deploy new optimizations or reroute resources to higher-performing areas.

How to make your customer loyal

• Focus on customer retention
  CLV is linked to many other business metrics, including customer retention. By providing an exceptional customer experience, businesses can increase customer satisfaction and loyalty, leading to repeat transactions and longer retention times. Businesses can achieve this with fast, friendly customer service, consistent product quality, strong communication, an intuitive and conversion-optimized website, and an accommodating return policy.

• Stimulate customer loyalty
  Beyond focusing on their core products and services, businesses have the opportunity to cultivate a holistic experience that keeps customers engaged and excited about their relationship with the brand. Implementing loyalty programs, such as rewards, discounts, and other incentives, can encourage customers to make repeat purchases and remain loyal.

• Personalize the customer experience
  Part of a high-retention strategy involves creating personalized experiences, with your products and your brand as a whole. These can include targeted recommendations, promotions, and communications to build stronger customer relationships, greater brand affinity, and more touchpoints for repeat transactions.

• Analyze customer data and act on the insights
  A carefully planned metrics-tracking operation is important for maximizing CLV. By analyzing customer data and reviewing reports regularly, businesses can gain powerful insights into customer behavior and preferences, which can inform targeted promotions and improvements to the overall customer experience.

• Create and invest in a brand ambassador program
  Encouraging customers to become brand ambassadors by providing incentives, rewards, and recognition can increase organic referrals, which bring in new customers at a lower cost than traditional marketing methods. Brand ambassador programs are worth exactly what you put into them. They can either be a huge boon for businesses, or a waste of time and money. For an ambassador program to be successful, you need thoughtful planning and robust engagement with your cohort of ambassadors.

• Engage post-sale
  Businesses can increase CLV with existing customers by engaging with them through email campaigns, surveys, high-value content, digital and in-person events, and other forms of follow-up, to encourage repeat transactions and positive word-of-mouth. The key is to consistently nurture positive feelings about your brand, keeping it top of mind, without flooding your customers’ inboxes with unwanted promotions.

Creating and executing a business growth strategy and optimizing revenue potential relies on a clear, functional understanding of the business’s financial performance. But gaining this understanding is more complicated than looking only at the company’s bottom line. Determining which metrics to track, analyze, and act upon requires strategic thinking. No matter which other metrics your team decides to use to monitor your business’s health, CLV will probably play a prominent role.

Customer lifetime value examples

CLV is most effective when it’s treated as an ongoing narrative of a customer’s relationship with your brand, rather than just a historical receipt. Here are some examples:

Customer lifetime value examples for in-person retail

Imagine a loyal customer, Sarah, who visits her local cafe every workday. She visits the coffee shop around 20 times a month, and spends $6 per visit. She’s planning to stay in her current neighborhood for around 5 years.

The CLV calculation for Sarah would be 20 visits x $6 x 60 months = $7,200.

Because Sarah’s long-term value is so high, the coffee shop can justify spending more money to acquire her.

Customer lifetime value examples for SaaS businesses

A project manager, Alex, signs up for productivity software. Alex starts on a $25-per-month plan. As a power user, he plans to stay subscribed for at least four years, and decides to upgrade halfway through year two.

In this case, the calculation for Alex’s LTV would look like this: ($25 x 18 months) + ($100 x 30 months) = $3,450.

Knowing that Alex’s CLV is nearly $3,500 allows the SaaS company to invest heavily in high-touch onboarding and premium customer support, since a successful first month can lead to years of recurring revenue and internal expansion.

Customer lifetime value examples for e-commerce

Consider an online boutique specializing in sustainable footwear. A new customer, Jordan, buys a pair of boots for $200. At first glance, the marketing cost to acquire Jordan might have been $50, leaving a smaller-than-ideal profit margin on that single box of shoes. However, Jordan returns once a year for a new pair of shoes and twice a year for accessories, averaging $50 per visit over a 5-year period.

The CLV calculation would be: $200 (initial) + ($200 x 4 years) + ($50 x 2 visits x 5 years) = $1,500.

When the boutique views Jordan through this lens, that initial $50 acquisition is minimal. Understanding this value encourages the brand to focus on post-purchase marketing, such as loyalty rewards, rather than just hunting for one-time shoppers.

How Stripe can help

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