What Is Customer Lifetime Value?

Customer lifetime value (CLV) is how much you earn from a single customer over the length of the relationship. It can be used to estimate the average value of a customer relationship and to predict the value of future customer relationships. For SaaS companies, CLV is a useful metric to understand the quality of both your solution and your customer experience.

How to Calculate CLV

There are a number of ways to calculate CLV, depending on what you sell, how much data you have, and how accurate you need your calculation to be.

In the case of a SaaS company, the simplest way to calculate CLV is to find your average monthly customer value and multiply it by the average lifespan of a customer in months. For example, the CLV of a software company with an average monthly value of $2250 and an average lifespan of 2 years (24 months) would be $54,000.

What Does Customer Lifetime Value Tell Us?

CLV helps companies make better business development, sales and marketing, and retention decisions. It helps quantify the amount of time and money they should invest in gaining or renewing a customer. And, it can be used to forecast profit by comparing CLV to average customer acquisition cost.

Segmented CLV

Finding your overall CLV is helpful for understanding your overall profitability, but it can provide so much more information with just a few extra calculations. One of the most helpful ways to break down CLV is by customer segment. This might include looking at CLV by software pricing tier, industry, or company size.

You can calculate average CLV based on these segments to get insights on what your best customers have in common as well as what increases or decreases CLV for your particular business.

How Can CLV Improve Customer Retention?

Knowing and understanding your CLV (especially by segment) can help you improve your overall customer retention and ideally, profit. With an accurate sense of your CLV, you can identify:

• Shared characteristics of your highest and lowest value customers
• Common drop-off points
• Key customers and accounts
• Best- and worst-performing sales and marketing tactics

These commonalities can help you make strategic changes to improve your customer retention and avoid overinvesting in new business.

Get Insights on Cross-Selling & Upselling Opportunities

By knowing your customer lifetime value, you can identify customers who have a longer than average lifespan but a lower than average value. These customers offer prime opportunities for upselling, cross-selling, and overall account growth.

Reduce or Avoid Customer Acquisition Costs

Knowing your CLV can also help you reduce or altogether avoid high customer acquisition costs. Since you know the expected value of a customer, you can set an acquisition budget to prevent overspending when signing a new customer and ensure long-term profit.

You can also identify customers who are similar or dissimilar from your ideal (high CLV) customers early on. Maybe your data shows that companies of over 500 people have a high monthly value but a short customer lifespan, causing a low CLV. Looking at the data qualitatively, you see that these customers often up outgrowing your offering faster than you can add the features they need, so they may not be worth extensive (and expensive) pursuit.

This knowledge enables you to put more time into your strongest relationships, provide additional training, take in critical feedback from key customers, and more.

Increase Customer Value

Once you know your average CLV, you can see if it’s enough to sustain your company and turn profit. You can also narrow in on key accounts to grow and explore common traits of successful customers to take on new business intentionally.

And, CLV can even help you make strategic company decisions. When monthly customer value and customer lifespan are both high, an increased CLV can let you know it’s time to raise prices or add new features.

RevSetter provides a deeper understanding of your customer lifetime value, so you can take control of your customer retention and success. See how with Customer Data and Insights from RevSetter.

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What Is Customer Retention Rate?

Customer retention rate is the percentage of customers who remain customers for a certain period of time. 

How to Calculate Customer Retention Rate

The customer retention rate formula is:

For example, say you sell a software solution with four pricing tier options. If you have 8 customers at the beginning of the year and 5 at the end, your customer retention rate is 62.5%.

However, customer retention rate doesn’t take the value of each customer into account. In order to do that, we’ll need to take a look at gross and net retention rates based on your monthly recurring revenue (MRR) or annual recurring revenue (ARR).

Gross Retention Rate

Rather than looking at the number of customers you’ve retained, gross retention rate (GRR) looks at the value of those customers. With gross retention, we take downgrades and customer churn into account, but not upgrades.

How to Calculate Gross Retention Rate

The gross retention rate (GRR) formula is:

With this metric, we can get a better idea of our overall customer success through the value we’ve retained, rather than just the number of customers.

With the value of each customer now providing some “weight” to our data, we can see that our gross retention rate is actually significantly less than our customer retention rate.

Net Retention Rate

Net retention rate (NRR) is very similar to GRR, but it takes both downgrades and upgrades into account for a more full picture of your customer success.

How to Calculate Net Retention Rate

The net retention rate (NRR) formula is:

While GRR looks at how well we are retaining customers, NRR can give a more complete look at our overall retention and customer growth.

Now we can see that our NRR is significantly higher than our customer retention rate and gross retention rate. While we are not retaining all our customers, we’re doing a good job with expansion by upselling, and cross-selling existing customers, ensuring our lead pipeline maintains its current rate.

These three metrics are key to improving your net revenue retention and tracking your overall customer success.

How Can You Improve Your Gross and Net Retention Rates?

Once you’ve calculated your retention rates, you may be shocked at what you find. So how can you improve customer retention and grow your business through your current customers?

Set Achievable Goals

The first step is to understand your starting point by calculating your retention rates, and setting reasonable goals to drive your business in the right direction.

You can do things the old-fashioned way, or you can try a customer success platform that will help you set, track, and reach your goals. You can break them down into manageable tasks, assign them to team members, add deadlines, and track progress, all in one easy-to-use interface.

Track Customer Communication & Improve Account Health

Now that your whole team is moving in the same direction toward your goal, it’s time to talk tactics. First up – tracking communication with your customers to improve the health of your relationships.

Integrate your CRM with RevSetter to see your last contact with each customer at a glance and create a priority list for follow-ups. RevSetter can even remind you or your team members automatically to check in with customers on a schedule.

You’ll also be able to track the strength of your customer relationships over time. In turn, you can more accurately forecast retention, expansion, and customer churn.

Measure Customer Data

The better you know your customers, the more able you are to meet their needs and improve your customer retention rate over time. With Revsetter, you can explore customer lifetime value, renewal value, and more at a glance to see the bigger picture and identify key accounts.

With our growth matrix, you can explore high risk and high opportunity customers to maximize retention and prevent unexpected churn.

Keep Customers Satisfied

A huge element of improving your customer retention is being able to grow alongside your customers to offer them the things they need before they go shopping elsewhere.

RevSetter helps companies identify upsells and cross-sells to meet customer needs and prevent them from looking for other solutions. Happy, fulfilled customers mean stronger retention and less need to bring in new business.Improve your customer retention rate and net revenue retention with RevSetter.

Take control of your retention strategy with a modern, intuitive solution. Improve your net revenue retention with RevSetter. Book a demo today!

The post How to Calculate Customer Retention Rate: Exploring Customer, Gross, and Net Retention appeared first on RevSetter.

What Is the Customer Journey Map?

A customer journey map is a flowchart or diagram that visually shows how a customer interacts with a company. It outlines customer touchpoints, typically categorizing them into four steps:

1. Awareness
2. Interest
3. Action
4. Retention/Growth

Why Is Customer Journey Mapping Important?

Customer journey maps are useful to companies for a number of reasons:

• They put customers in nice, neat boxes
• They help decision makers understand their customers’ motivations and needs (and inspire upsells and cross-sells)
• They assist with identifying and fixing customer pain points
• They identify gaps in the experience where potential customers may be lost
• They provide actionable information about how to market to customers based on where they are in their journey

So, What’s the Problem With The Customer Journey Map?

Traditional customer journey mapping can be a helpful tool for a typical B2C, product-focused company. But what about B2B sales? What about service and subscription offerings? And how can the customer journey map focus more on customer success than acquisition?

The reality is that when it comes to an on-going customer relationship (especially in the B2B space), customers don’t fit into nice, neat boxes. Relationships are complicated, and can’t be boiled down to a small handful of factors or steps.

The real customer journey:

• Doesn’t end with a single purchase
• Doesn’t stick to a specific timeline
• Is fluid, and can move between phases non-linearly
• Should be focused as much on customer retention as acquisition

What Might the Typical B2B Customer Journey Look Like?

The truth is, there is no typical B2B customer journey. Instead, let’s look at three examples of a customer journey for a B2B SaaS company.

Scenario One

A decision maker learns about your software through an ad. They look into alternatives but eventually decide to book a free demo. After the demo, they subscribe to your software and are onboarded.

They use and like the product, but never adopt it to its fullest potential, due to a lack of focus on retention. They are always a high-risk account. You retain them for one year, after which they cancel and opt for another software.

Scenario Two

A decision maker learns about your software through another business unit within their company. They reach out and you make a direct cross-sell. There is no competition for your bid.

You onboard the customer and focus on their success and retention until they become one of your key accounts. After two years, you have upsold their business unit to an enterprise license and have cross-sold to three other units in the company on their referral.

Scenario Three

A decision maker learns about your software and reaches out for a demo. Unfortunately, your software doesn’t have the features they need. They opt for another software, but remain aware of your business.

A year later, you reach out after a major feature update, and after a demo, the client subscribes to your software. You onboard them and stay alert to their feedback so you can continue to grow your offering to meet their needs and prevent them from becoming high-risk.

The New Customer Journey Map

So, if the traditional customer journey map isn’t applicable to your business, what do you do? We suggest thinking of the customer journey map as a dynamic lifecycle.

It’s not as easy to visualize, but you can create a lifecycle with custom stages like onboarding, growth, and adoption that fit your customers far better than a one-size-fits-all solution. Customers may move through these stages linearly, or they may move back and forth over time.

How Can You Use Journey Mapping to Improve Customer Retention?

Now that you’ve built your customer journey map, how can you use it to improve your customer retention? Here are four ideas to maximize value.

Go Beyond Click Attribution

The traditional customer journey map can put too much focus on a single point of conversion. And data and analytics can back those conclusions up. But the true customer journey consists of many touchpoints in time that eventually result in a new customer.

Understanding which touchpoints your best customers encounter can help you replicate their journey for future customers and high-risk accounts. And, considering what the customer journey might look like for lost leads can be just as telling. How can these pain points be mitigated to reduce and prevent churn?

Understand the “Average” Journey

In addition to looking at best and worst case scenarios, consider the “typical” customer journey. 

Looking at individual customer data makes it hard to identify trends and prioritize adjustments within your customer journey. But, with a dynamic customer map, you can build a persona and focus your efforts on the tweaks that will make the most significant difference to the largest number of customers and leads.

Identify High-Risk & High-Opportunity Customers

Dynamic journey mapping can help you identify patterns and predict lost customers before their exit. It can also help you spot “ideal” customers earlier on who may be a great opportunity for an upsell or cross-sell. Understanding these two edge cases can help strengthen your renewal and retention strategy and boost your net revenue retention.

Drive Your Company Forward

Once you understand what your custom journey looks like, you’ll have the insights you need to drive your company’s success and growth. Taking a deeper look at your customer journey can uncover completely new opportunities, whether that’s developing a new software feature or opening a new pricing tier for smaller companies. Let the pain points and successes you discover be your guiding light moving forward.

Build dynamic customer maps, track relationship strength, and improve your net revenue retention with RevSetter, our intuitive customer success platform.

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