The amount of revenue you generate per customer on average across your entire client base over their entire lifetime using your platform.
ARPA (Average MRR per Account) ÷ Customer Churn Rate
Why it Matters
Customer lifetime value (LTV), when analyzed alongside customer acquisition cost and churn make up the first essential metrics for scale- and expansion-stage companies. These metrics enable them to determine what capital is needed to invest in customer acquisition successfully, and how profitable those customers will be for the business. They also reveal what challenges exist to retaining and growing the customer base over the time needed for the companies' subscriptions to become profitable.
According to David Skok, in the situation where there is no expansion revenue expected over the lifetime of a customer, you can use this simple formula. [1] However, to understand customer LTV, gross margin should be accounted for.
When to Measure It
At the early stage, pre-initial market fit, it's not uncommon to have a high CAC, which is fine as long as retention is also increasing and your team is cognizant of the importance of customer success. As the company scales and CAC decreases, it's important to continue to increase LTV while driving down CAC.
Working with your marketing department to generate a consistent inbound marketing qualified-lead velocity is one of the best ways for SaaS companies to decrease customer acquisition cost and maximize LTV.
Industry Benchmarks
Successful SaaS companies should aim to realize a lifetime value three times greater than the cost of customer acquisition (3:1). [2]
Works Cited:
- [1] Saas Metrics 2.0 - Detailed Definitions
- [2] SaaS Metrics – A Guide to Measuring and Improving What Matters
Additional Resources:
- http://www.forentrepreneurs.com/saas-metrics/