How To Increase Customer Lifetime Value For SaaS Businesses
Most conventional businesses measure the amount of revenue you make for every deal you close. And your relationship with a customer ends there when the purchase is complete.
SaaS businesses do not work like this.
When you sell your SaaS product, the customer relationship doesn’t end at the point of purchase. In fact, it only starts there.
Your relationship with your customers can last many years. Every customer has the potential to generate revenue over a long period of time. At best, it can even last 10 or 20 years.
With that, how do you measure the revenue that each of your customers brings into your SaaS business?
Well, there are several key performance indicators (KPIs) that can be used for SaaS businesses. The most widely used would be annual recurring revenue (ARR). Other examples include retention and churn rates.
But there is one KPI that measures and estimates how much total revenue you can get from a single customer. That would be the customer lifetime value (CLV).
What Is Customer Lifetime Value?
Customer Lifetime Value (CLV) is the expected revenue that one customer brings to your business over the entire customer lifespan. It’s one of the most important marketing KPIs that a SaaS business needs to track.
There are two ways to compute for your CLV.
Calculating CLV With Historical Data
The first one is if your business has been around for quite some time and you have historical data about how long your customers stay. You would need another two metrics for this:
- Average customer lifespan
- Average revenue per account (ARPA)
The average customer lifespan is the average amount of time that your customers stay with you.
For example, you have three customers. One of them stays with you for 5 years. Another sticks to your product for 10 years. And the last one uses your product for a total of 15 years.
By getting the mean of these three durations, you have an average customer lifespan of 10 years.
Now the ARPA is the average monthly or annual recurring revenue you make out of each customer. You can calculate it by simply dividing your monthly or annual recurring revenue by the total number of customers that you have.
For example, you have an ARR of $20 Million from 40,000 customers. That amounts to an ARPA of $500.
Now, if you have already computed your average customer lifespan and ARPA, you can compute your CLV with this formula:
Yes, it’s simply multiplying the two.
Let’s take an example from our scenarios earlier. You have an average customer lifespan of 10 years and an ARPA of $500.
That results to a CLV of $5,000.
Calculating CLV Without Historical Data
What about businesses that don’t have historical data? What about startups that haven’t existed for more than a year? Is there any way to predict their CLV?
Of course, there is.
If you don’t have any historical data to find your average customer lifespan, you can instead find the customer lifetime rate.
Finding the customer lifetime rate is simply dividing 1 by your churn rate. For example, you have a churn rate of 10%. Divide it by 1, and you get a customer lifetime rate of 10.
To find the CLV, you multiply the customer lifetime rate with the ARPA.
So if you have a customer lifetime rate of 10 and an ARPA of $500, you get a CLV of $5000.
How CLV Is Used In SaaS Businesses
CLV is a very useful KPI because it tells you how much revenue you can expect from each customer that you have.
It is usually used side by side with the customer acquisition cost (CAC). In fact, the CLV:CAC ratio is a very useful KPI to determine if you’re getting a positive cash flow.
SaaS businesses should aim for a ratio of at least 3:1. That means you’re making a revenue of $3 for each dollar you spend on customer acquisition.
Customer lifetime value is a metric that helps you determine your customer’s true worth to your business.
Sure, you have the ARR and MRR. But these metrics don’t account for the fact that your customers may leave one day. The recurring revenue may stop anytime.
But CLV deals with the total revenue you get from a customer. A higher CLV means higher recurring revenues and/or longer customer lifespans.
That’s why the goal is to increase that CLV as much as you can.
Today, we are going to talk about ways you can increase your CLV. As we do, we will emphasize one particular method.
Let’s dive right in.
How To Convert Lifetime Deal Customers Into Subscribers
One of the things that SaaS businesses can do to boost their revenue is to launch SaaS lifetime deal (LTD) campaigns. These are short-term offers for a perpetual license of your SaaS solution.
It’s a good way to bring in a lot of early adopters and create an initial surge of profit that can be reinvested for further growth.
However, LTDs do not produce recurring revenue. Sure, the one-time payment can be considerably larger than the usual subscription fees. But that payment amount would essentially be the CLV.
If you offer an LTD for $200, that’s your CLV right there. That’s so much lower than what you can get if you offer a subscription instead. If it costs just $50 per month, you would have an ARR of $600. With an average customer lifespan of 10 years, that’s a CLV of $6000.
That’s why LTDs are not the goal. Subscribers are.
Here are some strategies you can do to convert LTD customers into subscribers:
- Deliver just the right amount of value
- Build new features
- Keep building relationships with your customers
Let’s talk about each of these strategies in detail.
Deliver Just The Right Amount Of Value
The key to winning over your SaaS customers is to deliver value. Some SaaS businesses and marketers know this as the “A-ha!” moment. It’s the exact point where a customer or potential customer sees your SaaS product’s value for themselves.
If you want to turn your LTD customers into subscribers, they need to have that “A-ha!” moment with your SaaS solution. They need to experience the value of your SaaS product.
And I mean A LOT of value.
Remember that this is an LTD, not a freemium model. Not meeting freemium users’ expectations only means churn or losing a potential paying customer. But disappointing an LTD customer means issuing refunds.
With LTDs, your users have already paid for your product. They are expecting to receive value and even get an ROI as soon as possible.
If you fail to do this, you might end up sending more refunds than you would like.
But here’s the thing: you need to deliver just the right amount of value. You can’t give away everything you have right away.
If you deliver too much value, you might end up getting your LTD customers to stay as LTD customers and not subscribers.
Find a way to deliver value to your customers AND make them want more.
One way to do this is to limit the features and inclusions accessible in an LTD.
And you can get creative with these limitations. Whatever kind of SaaS product you are selling, there’s a way to make your LTD customers want more.
For example, let’s say you’re selling an AI writer. You can limit the number of words that your product can generate per month. It would be enough to write several long-form articles. But for heavy-duty content generation, they would need to upgrade to a higher plan.
Another example, let’s say you have a file management solution. You can put a limit on the total file storage allocation. Allow enough storage space for a few years’ worth of files. But once they reach the limit, they would need to subscribe to more advanced plans.
Build New Features
Another way to convert LTD customers into subscribers is to give them something new to subscribe to.
One of the major advantages of selling a SaaS product is that it undergoes consistent updates and improvements.
In fact, it has to. Otherwise, your customer experience will start to suffer. Product updates are necessary for patching bugs, keeping with industry trends, and giving your long-time customers a fresh experience.
And the best part is that you can get the ideas from the customers themselves.
That’s why you always need to be on the lookout for user reviews and comments. They help you know what problems they encounter or what features they wish they had. They will also show you what patches or upgrades to add to your SaaS product.
And every new feature you release is an opportunity for customer conversion.
When you release a new feature, hype it up. Show every customer and prospect what it can do. But only offer it in your higher plans. Give your LTD customers an irresistible reason to upgrade to a subscription plan.
Keep Building Relationships With Your Customers
I know this is a no-brainer for SaaS businesses. But sometimes, it might not be that easy when it comes to LTD customers.
They may have paid a one-time fee for your SaaS product, but the costs for their accounts are continuous. You still spend resources for their customer support and server allocation. But it shouldn’t affect the way you treat them.
In fact, you can view your interactions as opportunities to convert them into subscribers.
You can build customer loyalty through customer service and success efforts.
A strong sense of trust and loyalty between you and your customers can give you several benefits. Not only will it convert them into subscribers. It can turn them into advocates and make them bring in more referrals.
When you have a solid relationship with your LTD customers, it would be so much easier to sell a higher plan or a new feature.
6 Strategies For Increasing Your CLV
There are a lot of other ways you can increase your CLV.
Remember that the two factors that affect CLV are how much your customers pay and how long they stay. Anything that would improve either of those factors should increase your CLV.
Here are some strategies for that:
- Improve your onboarding process
- Provide omnichannel customer support
- Monitor user reviews
- Double down on unhappy customers
- Establish a strong social media presence
- Leverage content marketing
Let’s talk about them one by one.
Improve Your Onboarding Process
Ensure that your customer onboarding process is as smooth as possible.
This should be a major part of customer success efforts. You have to continuously improve it so you can stay ahead of user expectations and demands.
That might sound like a lot, but there are a couple of easy ways to do this.
One way is to shorten onboarding times. Try putting up guides or tutorial videos right from the start, so they know how to use your product even before signing up.
Or to make things easier for them, try making online help centers accessible right from the beginning. This way, your new customers won’t need to contact support if their questions are related to those that the online help center offers.
It’s also important that you provide success managers with customer data, so they can answer concerns immediately.
Provide Omnichannel Customer Support
Speaking of addressing customer concerns, you should be able to do it in all channels.
Your customer support efforts don’t have to be limited to email or phone calls. It can also include social media, live chat, and online tutorials.
You might also want to run a SaaS community. This would be a good place for your customers to receive peer-to-peer support and just share experiences with each other. This will boost brand loyalty among your users.
What’s more, this community can also be a good platform for generating high-quality leads. With the right content and interaction, you can even convert them into customers.
Listening to your users and fostering a sense of community are crucial for customer success now more than ever. You want to provide comprehensive and immediate support. So customers must always be able to get help via multiple different channels.
Besides, the easier the access to customer support, the more satisfied they are. They don’t have to go through all kinds of hoops just to get their concerns heard and resolved.
More satisfaction among your customers will mean higher retention rates. And higher retention rates will mean a greater CLV for your users.
Monitor User Reviews
Another way to keep your customers happy is to monitor their feedback.
It is critical that you respond effectively to customer complaints, questions, and requests. Don’t be dismissive or try to dodge the issue.
In fact, even if they are not happy with your SaaS product, you can still win them over with polite and helpful responses.
If they say something is broken, then fix it as soon as you can.
If they ask for a new feature, then account for it in your product roadmap. If they give you suggestions for how to improve customer success, test these suggestions out.
There are various platforms where you can find your customers’ reviews. If you’re launching an LTD campaign through listing sites like AppSumo and ProductHunt, you can find some reviews on the listing itself.
User reviews are a great way to know what your customers want. So keep an eye on them and make adjustments as necessary. This will help you improve customer satisfaction among your customer base.
Double Down On Unhappy Customers
Keeping your churn to a minimum is one of the best things you can do to raise your CLV.
One of the best ways to reduce customer churn is by turning unhappy users into loyal ones. You can’t just ignore or push them away. This will only cause more churn and hurt your CLV even more.
But how do you even begin to win your unhappy customers over?
First, you find them.
As we discussed, you can look for your unsatisfied customers through the reviews. But how about those who don’t leave reviews?
You can perform a Net Promoter Score (NPS) survey on all of your users. This is a customer loyalty survey where you ask your users one question: “How likely is it that you would recommend our product to a friend or colleague?”
It looks something like this:
Based on the data from this customer loyalty metric, you can pinpoint customer churn causes and unhappy users. You should also be able to identify which customer segments are at high risk of churning.
Then, build up their confidence by following up on promises and requests. This will help win over some of your less happy users while improving customer support at the same time.
What’s more, if a customer complains about something that hurts your brand reputation, then you must repair this damage as soon as you can.
Again, don’t dodge any concerns or questions just because you’re afraid they might tarnish your brand. You must address customer concerns and issues in order to build trust between you and your user base.
Establish A Strong Social Media Presence
Customer engagement is one of the keys to keeping your users happy. You have to keep in touch with your user base through marketing and customer management techniques.
And social media is an effective way to reach out to your customers and show our appreciation towards them.
But not just any social media: we’re talking about Facebook and Twitter.
These two platforms are extremely valuable tools when it comes to reaching new users and engaging with current ones.
You can establish a good customer relationship over these channels, even if they never visit your site or call up customer service for help.
You can post user stories and reviews on your Facebook page. You can also use videos, photos, and infographics to catch the attention of your followers and new customers.
For instance, you could show user testimonials on a product video or upload videos about their experience with your brand. This is a great way to promote customer loyalty and win over potential users who want to learn more about your business before they buy from you.
Social media allows you to talk directly with every single customer out there. So don’t be afraid to speak up.
Leverage Content Marketing
Content marketing and customer retention go hand in hand. You can build customer relationships by producing valuable and interesting customer-oriented content. This helps you stand out from the competition and establish your business as a customer-driven brand.
The content that you publish and share doesn’t even have to mention your product or brand. These can just be guides on the common concepts and problems within your chosen niche.
Still, nothing’s stopping you from creating tutorials and how-tos for your SaaS product.
One SaaS brand that does this so well is HubSpot. It has a huge library of blog posts and articles for almost any topic related to its product.
As a result, it is one of the most trusted brands when it comes to marketing, sales, and customer relationship management (CRM) platforms.
This is exactly the sort of customer relationship you want with your brand. Producing content with authority secures customer loyalty, brand reputation, and customer advocacy.
Getting Your Customers To Pay More and Stay Longer
At the end of the day, improving your CLV boils down to building relationships with your customers.
Having a solid relationship with them will make it easier to upsell subscription-based payment models and increase your average revenue per customer. It will also boost your customer retention rates.
Getting your customers to pay more and stay longer. Aren’t those the real goals in improving your CLV?
For more strategies in growing your SaaS business, check out our SaaS marketing blog.