CLV, Cohort Analysis, and Survival Curves
Posted by Jeff as Uncategorized
Customer Lifetime Value (CLV) is an important metric in any SaaS business, it explains the potential for profitability and more directly the extent to which a company should spend to acquire customers, measured as Customer Acquisition Cost (CAC).
Custora is a company that provides an analytics platform specific to customer value and survival, which is a cohort analysis of customers acquired month by month to analyze how quickly each group churns out.
CLV forms the foundation for a probability model through which a company can forecast future recurring revenues, because every SaaS company exists within the frame of every customer renewing their contract at the end of each billing period (month).
The cohort analysis weights the group of customer acquired in a given month with their probability for renewing. Think of it this way, every customer has a coin they flip at the end of the month, renew or cancel, and in any given population of customers you want to know what the probability weighting of coins are for renewal; the cohort analysis provides this weighting while the CLV estimates the value of an individual customer in that population.
The customer survival curves are valuable for a couple of reasons, the first being the rather obvious benefit of seeing where most of your churn is happening, however this leads to a more insightful analysis about the type of customers you are attracting as a company. Simply put, if the customer survival curve is very steep, as in a fast falloff as churn chips away at each cohort, then the conclusion you can draw is that you are attracting the wrong customer for your product.
Churn is a naturally occurring factor in all SaaS businesses (and all non-SaaS businesses!). The point is that you have to strategize around managing it down to a number that is equal to or better than the average for your peer group and analytics such as what Custora provides are a good investment to make in this area.
At Get Satisfaction we have used a variety of homegrown and data services to instrument our business for day-to-day management and long term planning. We worked with Custora under their previous company name and then I let the service lapse as I built up an internal data warehouse of performance tracking metrics. I missed the dashboard and analytics drill downs that Custora provides, which because they are very focused around a specific problem set tend to be more useful than endless spreadsheets, so we are back to using Custora for customer retention analytics.