Customer lifetime value (LTV) is one of the most important unit economics measurements your B2B software company should be tracking.
What is customer lifetime value?
Customer lifetime value is an important metric, since it can be directly affected by your customer service and customer success metrics. Customer lifetime value measures the total revenue your business can expect from your average customer. This measurement is impacted by the typical purchase amount of your customers, your renewal rates, and the average length of your customer journey.
How do I calculate LTV?
There are a few numbers you’ll need to calculate your customer lifetime value:
- Average purchase value: total revenue / number of orders
- Average purchase frequency rate: number of purchases / number of customers. For B2B software companies that have annual renewals, this number will likely be 1
- Customer value: average purchase value / average purchase frequency rate
- Average customer lifespan: sum of all customer lifespans / number of customers
And, finally, you can calculate your customer lifetime value by multiplying your customer value and average customer lifespan.
How do I improve my customer lifetime value?
There are 3 overall ways to improve customer lifetime value.
First, you can improve your LTV by increasing the revenue you get from your customers. This can be difficult for B2B SaaS companies, but this can be achieved by increasing prices or upgrade rates.
Second, you can improve LTV through focusing on customer satisfaction. Improving customer satisfaction will lead to increased renewal rates and decreased churn, having a direct impact on your LTV.
Third, you can improve LTV through increasing customer retention. Similar to focusing on customer satisfaction, increasing customer retention will have a direct impact on your LTV through increasing customer lifespans. Harvard Business Review found that acquiring a new customer is 5-25x more expensive than retaining an existing customer. Improving customer retention not only improves your LTV but also improves other business metrics through decreasing costs.
Now that you’ve improved your customer lifetime value, what’s next? Check out our guide to how B2B founders should think about revenue growth.