Key Performance Indicators (KPIs) for Software-as-a-Service (SaaS) Companies – Customer Life Time Value (CLTV)

During their expansion stage, a lot of SaaS companies find themselves in a stage where the volume of their revenue and customers accounts put them far ahead of the new startup companies, but their financial infrastructure is far from being well established for successful scaling up and is far from being aligned with the company exit strategy. In previous blog posts I discussed Churn Rate, Monthly Recurring Revenue (MRR), Committed Monthly Recurring Revenue (CMRR), Cash, and CAC ratio for the SaaS companies.

The grasp of the previously discussed KPIs allows for a relatively simple calculation of a very important financial indicator for the SaaS companies – the CLTV (Customer Life Time Value). To calculate the CLTV of a given customer cohort you need to use the CMRR, the Churn Rate, and CAC ratio for this cohort. The first step is to annualize the Gross margin CMRR and decrease it to arrive at the revenue that is left after the G&A and R&D costs are covered. Divide the result by the churn rate of this cohort and the result will be the expected net earnings over the life of the cohort. Lastly, these earnings need to be adjusted for the initial customer acquisition costs which can be calculated by dividing the Gross margin CMRR by the CAC ratio. Of course, the CLTV value can be further refined by discounting the projected future earning by the company’s cost of capital. 
 The goal for the expansion stage SaaS Company is to have a positive CLTV. Clearly, the CLTV is more advanced way to look at the company’s economics, and this is why Bessemer Venture Partners have it as the last of the six KPIs that a SaaS CFO needs to be very familiar with (discussed in the “Bessemer’s top 10 laws of cloud computing and SaaS”).