Customer Lifetime Value For SaaS
Are your acquisition costs higher than your subscription fee?
23 October 2022
When you begin a SaaS business, your customer acquisition costs are usually high. Your customer either has no idea how you are about to make their life easier or your customer is already loyal to another company selling a similar software product/service.
So how do you steal your competitor's existing customers? How do you penetrate the market and sink your venom into the competition's most loyal customers?
Would a high discount rate reduce your overall revenue? Would charging a higher price decrease the customer loyalty of the average customer?
These are all questions that a new SaaS startup must answer. Sometimes, the customer acquisition cost may completely scare new business owners, especially when they see their net profit as negative, as a result.
Also Read: How does Email Authentication Work?
With a subscription service such as a SaaS, every additional customer does contribute to total revenue, but even if that contribution is marginal or even negative, the monetary value of that customer is not to be based on the current customer transaction.
Instead, it should be calculated according to the customer lifetime value (CLV).
Many SaaS businesses are focusing on acquiring new customers, while it is cheaper and possibly easier to reduce the churn rate instead.
What is CLV and why is it relevant?
If you have good customer retention and strong customer relationships, your customers are not going to be limited to one purchase.
For example, in a SaaS business, your new customers are likely to continue the business relationship with your business for an average of three months while your best customers have a customer lifespan of about a year.
That means while it may have cost you about $200 to acquire a new customer and your monthly subscription is $30. However, that doesn't mean you have incurred a loss. The customer is likely to stay with you for several months contributing to your gross and net margins.
That same customer may also recommend your SaaS to their colleagues, friends, family, etc. which would introduce you to new customers without putting in a lot of marketing efforts.
Such customers are high-value customers and your aim as a business is to acquire as many such customers as possible in order to maximize future revenue.
Before we tell you how to extend your customer lifetime value, let's look at how to measure customer lifetime.
How to measure Customer Lifetime Value?
Retently mentions that CLV tells you how much net profit you can make from an existing customer throughout the time they are with you.
If you can just keep the customers you have, you can increase your average revenue instead of trying to acquire new customers every day.
Now that we have talked about calculating customer lifetime value, let's talk about how a SaaS business can extend the average lifetime of a customer.
Improve the onboarding process
As a user, how many times have you signed up for something and then been very confused about how to use it?
It happens often. Therefore, to reduce your churn rate and increase the customer lifetime value, you need to improve the onboarding process.
Retently also mentions that a flawed onboarding process increases the churn rate by 23%.
Provide exceptional customer service
Customers need to be able to troubleshoot or understand your process whenever and with remote working and teams all over the globe, it is a good idea to offer 24/7 customer service. If that's a big ask, then you need to at least ensure that your turnaround time is fast and you respond to queries within a couple of hours.
If customers are able to figure out things whenever they are confused, this can significantly increase the customer lifetime value and strengthen the customer relationship.
Nextiva mentions that just one poor instance of customer service results in one-third of customers switching from a SaaS company.
Educating your customers and making everything available to them increases customer satisfaction. Ensure you maintain a knowledge base or a help section with how-to articles, videos or guides on how to use the software and how to troubleshoot.
Make sure you include a section for Frequently Asked Questions so that your customers can get answers to common queries that they may have.
Keep in touch
You have probably heard the saying, " out of sight, out of mind" and if you don't regularly keep in touch with your customers, this can affect your average lifetime value.
Go above and beyond a typical customer relationship and send your customers emails telling them how your software helped them that month and what you have planned for the future.
Send them product roadmaps, great content, and humorous and personalized messages, and offer them similar tools and services for free or for a small fee based on their purchase frequency.
Before you send your customers emails, ensure you do not end up in spam by warming up your email domain. Pribox can help improve your email deliverability significantly.
Continue to gauge pain points
Certain customer segments may have other pain points that your software is not addressing yet and if you leave these unaddressed it will lead to your customers choosing a competitor over you. You need to keep analyzing customer needs to improve customer retention.
Make a map for the needs of the average customer that you are targeting and also anticipate what needs they may have in the future.
See what competitors are offering and then add features that provide solutions to upcoming pain points in your roadmap.
Smaller requests should be dealt with in days if you have a responsive development team and the average value of the customer asking for a particular feature is significant.
Begin a loyalty program
It doesn't hurt to reward your customers for loyalty. You can give them a month off after every three months or give them reward points for every referral. If you don't want to give them a month off your own software, you can partner with other complementary tools and give free subscriptions or discounts on those tools while using your software.
You can also give them free tickets to concerts, hold lucky draws, or send long-time customers random gifts to appreciate their loyalty. Everyone loves freebies.
Provide a better experience
Different customers require different features. You can increase customer profitability by providing a better experience. Work with your UX team to ensure the in-app experience is as smooth and intuitive as possible.
Also, use in-app messages to convert your customers from a lower-priced plan to a higher-priced plan. In-app messages based on the moves a customer makes can help you provide more value to the customer and also help them make informed decisions about upgrading to a better plan.
This is pivotal for long-term value and more revenue.
If you do all of these things and your customers are really satisfied with your product, a small price increase may not even bother them. Charge customers based on how likely they are to leave if you ask for a little more money.
It's okay to reduce your gross margin for a short time, as long as your customer lifetime value keeps increasing.
What is a good lifetime value number?
A good lifetime value number is a number that exceeds your customer acquisition costs. Therefore, in the long run, your customer should be contributing more to what your business earns over what you paid to attract and retain the customer.
What can affect CLV?
CLV is affected by the average purchase value, purchase frequency, and customer lifespan.