Why Lifetime Value is Relevant Again in Software
Budget cuts followed interest rate hikes in 2022. By late 2023, more than a year of financial scrutiny had challenged many publicly traded software companies.
However, 2024 has been a tough year again.
Net dollar retention for publicly traded software companies fell from 113% on average to 108%, a five percentage point drop. 80% of publicly traded companies saw their NDR wilt again in 2024. Overall account expansion remains roughly 5 percentage points above inflation.
There’s a similar story in payback periods. The average publicly traded company saw paybacks increase by 9 months from 35 months to 44 months. That means most software companies aren’t achieving positive contribution margin until the fourth year of a customer. Again, 80% of companies saw paybacks worsen.
I’m not a fan of lifetime value (LTV) in startups (how can one predict a 7 year customer lifetime value if the company isn’t yet 7 years old?) But for public software companies with these sparser economics, LTV becomes an important determinant of whether & when to invest more in growth.
If paybacks are 4.5 years & LTVs are five years, that data should provoke strategic questions about the company operations.
T-test p value of 3.087e-06
T-test p value of 0.0002297
Data source is Jamin Ball’s Clouded Judgement
Co-founder & COO @ Sirius Education | Forbes Under 30 | Changing Higher Education
1 个月Camila Florentino sobre o que falamos
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1 个月Very informative THANK YOU FOR SHARING
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1 个月?????? .:il
CEO Ibbaka Performance - Leader LinkedIn Design Thinking Group - Generative Pricing
1 个月Data on private SaaS company NRR from the Peakspan Ibbaka NRR Survey for 2024 shows average NRR of just over 105% for the previous year but improving slightly to 106% in the current year. The report should be published next week. But averages are deceiving as there is a lot of variation between SaaS verticals and even within some verticals.
Leading, Building, Teaching
1 个月LTV is an imperfect model, but it’s still useful. It’s also evolving as buyers continue to consolidate vendors - pushing churn up and LTV down almost everywhere. An LTV that looked good in 2021 likely looks less attractive in 2024 - based simply on buyer behavior.