- Articles

SaaS Customer Lifetime Value (3 Strategies to INCREASE Your LTV)


– When it comes to
running a SaaS business, there are so many crazy
metrics that you need to track and actually measure for
and actually optimize for. It can be a little dizzying, it can be a little overwhelming. I’ve been there. There’s this one metric that I found was the most important
metric, at least for me. When I thought about taking a long view on building my SaaS business
and creating true value on really growing at the right way. There’s just one metric
that ended up mattering no matter what for every SaaS business, that I’ve been part of,
and every SaaS business that I now advise, and that is
your Customer Lifetime Value. The higher your customer lifetime value, the more you can actually
spend on sales and marketing, the more of a healthy
business that you have, the more of a thriving
ecosystem that you have. Everything comes together nicely when you have a very high
customer lifetime value. So on this episode, I’m going
to dig into this metric. I’m going to explain exactly
what it is, how to measure it, and three strategies that you can use to actually increase your
customer lifetime value. Intro. (whooshing) (upbeat music) What’s up everybody. Welcome to Unstoppable. I’m TK, author of the book, “How To Punch The Sunday
Jitters In The Face,” entrepreneur, Startup
founder and Angel investor. On this channel I help
startup founders like you create and execute on
an unstoppable strategy for your life and your business. I drop an episode like
this every single Sunday with the TK energy, so be sure
to hit the subscribe button and the bell icon if
you’re new, and that way you’ll get notified every
single time I drop an episode. And by the way, welcome to
The Unstoppable Community if you are new, still
happy to have you on. Well, those of you that are returning, I don’t know about you, but this community is really starting to come alive. So I’m having so much
fun doing these videos. I appreciate all the
comments, all the likes, all the emails, all the
tweets, so keep them coming. And I really want to
also shout out to you. I know you’re already
subscribed but thank you for being part of this
little movement here. Whenever I get pulled in to
diagnose a SaaS business, whether it’s doing well and they want to accelerate it faster or they’re kind of stuck
and they’re not sure where they can raise that
next round, they really need to figure out how to accelerate growth. I always go to my trusty flywheel
my SaaS Business Flywheel, my Unstoppable Flywheel
because when I map out any SaaS business, onto this flywheel, I’ll clarify what their ICP
is, and I start to track how they’re actually moving through these five important
metrics, I’m able to diagnose any SaaS business and start to understand three great growth strategies
that we can implement to accelerate that growth, to actually get them out of trouble. On this episode, I actually walked through what these five metrics are,
how this flywheel works, why it’s important. So I’ll link to it below
so you can check it out. On this episode, I went
into how to actually craft your ideal customer profile, which is at the heart of this flywheel. I’ll also link to that below. And then on my last episode
I dug into, which is this one and again, I’ll link to it. You don’t have to watch now,
you can watch it after this. I explained how you can
have these five metrics, which are what I would
say Leading Indicators. But the two metrics that
investors care about the most, which are the Lagging Indicators, is your Customer Acquisition Cost, and your Customer Lifetime Value. Now, on the last episode,
I actually walked through what a Customer Acquisition
Cost is, how to measure it, and the three strategies
you can use to reduce it. So I’ll link to that
video, but after this, so you can check it out. Now on this episode, I’m going to dig into your Customer Lifetime Value,
because quite honestly, I have all these metrics and
yeah, you’re going to use these metrics to kind
of navigate your path to product market fit. When it comes to a truly
successful SaaS business, your customer lifetime
value is pretty much the only thing that matters. So if you’re excited to
dig in, and you’re excited to get started on this, go
ahead and smash that Like button and let’s dig right into it. So first of all, you might be wondering, all right TK, Customer
Lifetime Value, what is it? Now the simplest way to
think about it is on average, how much is your average customer actually spending with you? There are couple of components
that go into this right? The first component that
goes into this is the ACV. The ACV is what the
Average Contract Value is, for every customer you’re bringing on. If every deal of yours
is a 20 to 100K deal, that’s your ACV. And that’s going to impact
how much each customer is going to bring you, what
your average lifetime value is. The second component
that comes in is Churn. If your customer sticks
around after the first year, let’s just say you’re
doing one year billing, if you’re not doing one
year billing yet, start because it makes a big difference. If you’re doing one year billing,
and if your churn is high, they leave after the first year, then your customer lifetime
value is pretty much going to be one X your average contract value. But if on an average your
customers are actually sticking around and
actually staying with you for multiple years, then
you’re going to be one X, two X, three X, four X
or whatever it may be of your average contract value. So you can start to see how
these two start to multiply to yield your average customer value, lifetime value is going to be. Now there’s a third component to this, which is actually one of
the powerful components, it’s called Net Retention. And net retention is one
of the other metrics, that feed into impacting
this customer lifetime value, which is why I like customer
lifetime value so much. It’s a compound metric that
really, really encapsulates these important aspects
of a SaaS business. Your Net Retention means
out of the customers you’re keeping, like
forget the ones that churn, are they actually paying you more. Net retention rate when
it’s greater than 100% when it’s like 130%, or 160%, is what? Some of the best SaaS businesses have, they have this because every year, there are a subset of
customers that are staying but in subsequent years, they’re paying more and more and more. So when net retention rate
goes up, when churn goes down, when your ACV goes up,
all these three metrics come into this one compound metric of customer lifetime value. And when you get optimized for
that customer lifetime value and measure it, you know, you’ve
got a very, very successful SaaS business and when
you’re optimized for this it means that you can go raise more money, to put more into sales
and marketing your score, start scaling it faster
and faster and faster. Now it sounds great and it’s awesome. But what if your customer
lifetime value is not that great? What if you’re in the early
days, and you don’t quite know if you have enough data
points to really understand a customer lifetime value? Let’s just say you’re on
year one of a SaaS business. What do you do then? So there’s two things to this,
I’m going to dig into this. I’m going to go through
the three strategies that you can use to actually increase your customer lifetime value. Before I do that those
strategies are going to really come in handy if you
are on a SaaS business that has revenues and your
post one millionaire are, you’re on year two of the
business and you’re like, “All right, how do I really crank this?” If you’re in the early days,
you really don’t know how much of them are going to
renew, you really don’t know what people are going to do and whether you even
have product market fit. So the one thing I’ll
tell you is if you’re just starting out, don’t worry
as much about CAC and LTV. I want you to watch this video
because I want you to know what to do after you get
to that product market fit but you don’t have to over
index on these two metrics yet. What you should be hyper
focused on is this flywheel. This flywheel acquisition, activation, revenue, retention referral. That’s what you need to be
focused on in those early days. As you get into later days, let’s just say you’re in year two, year three
year four of the business or you’re on your five
and the business stalling, you should still look at these,
you should look at your ICP but, you really want to look
at optimizing your CAC and LTV. Now that you know what
LTV is, you know exactly how to think about it, all the
components that go into it, you’re like, “All right, cool
I’m in, how do I improve it? “How do I actually increase
my customer lifetime value?” Glad you asked. Now, if you actually want to increase your customer lifetime
value, the first thing I want you to focus on
is how do you actually teach your customers more? How do you actually educate
them on how to use the product, the big movement you’re
creating around your software and your product, how to
educate them on how to think about that macro trend,
and how to educate them on how to actually use the
product more effectively. In the early days of Tawheed,
we didn’t have sales people. We didn’t have support people. All we had where Happiness officers. And these Happiness
officers, their one sole goal was to ensure that the kept
teaching our early customers on why they need the
product and how to use it and how to get success from it. But these days in a more
mature SaaS company, you will have salespeople,
you’ll have SCRs, you’ll have CSMs and you’ll
have all those people dividing up those duties. But as CEO at the culture
level, at the top level, you have to start thinking
about, how every single one of those functions is
going to start about, start to think about teaching,
how to use your product and get success from your product, instead of just selling, selling, selling. If you can out teach the competition, you’re going to rise above everyone else and you’re going to drive
so much more loyalty, which will actually not only drive activation in your product,
which is super important, but it will actually
start to impact churn, it will start to impact net retention and people will even start paying you more because you’ll become a brand
that is a teaching brand. So my strategy number one,
if you want to actually increase your customer lifetime value is to start thinking about teaching. Now, when we were at Marketo,
we made huge investments in what’s called Market University. We made huge investments
into actually highlighting the people that were successful
Marketo practitioners and sharing the best practices
that they were using. Even at Toyota, we had Toyota University, that sales university had sales templates, all these things came together,
where we were teaching our customers to better use
our product and get more value, which essentially helped
us elevate our brand, and actually accelerate our
customers path to success. So don’t think of it as marketing, don’t think about it as sales,
think about it is teaching. And when you do that, and you align the entire organization
around it, you can actually impact your LTV number. The second strategy is to
actually start measuring NPS. Now there’s a whole lot
of body of knowledge on how to actually run an NPS survey. There can be an easy one, there
can be very complicated one, you can get a complicated
platform like Qualtrics, or you can do a simple Google forums. With one question on,
“Hey, would you recommend “this product to a friend.” I don’t want you to get
overwhelmed around this, all I need you to do is
start tracking your NPS score and start measuring how you’re doing and whether you’re getting
better and better and better quarter after quarter after quarter. Because guess what, if
a customer is unhappy, they may write in some support
tickets, they may not renew. But by the time they’ve done
that, it’s already too late. What you want to do is
start measuring NPS, is start and you want to start measuring the user sentiment early on,
so you start to understand if all the things you’re doing
is actually making things better and better and better. If you have a strong NPS,
everything else becomes easier. Your customers become more
loyal, they’re willing to pay more and all those
things, they won’t leave. All those things will add into improving this customer lifetime value metric. When I was doing this video, honestly, I had a little bit of an aha moment. I always knew that the
customer lifetime value metric is important, investors care about it, I cared about it as CEO, but
when I started to actually take a step back and really
distill down all the components that go into optimizing for
your lifetime value, I was like, “Oh my God, this really is one
of the most important metrics “in any SaaS business.” At the end of the day, the
magic of a SaaS business is it’s subscription based,
people can get into it easy. But the hard part is you have
to keep earning that business every single month or every single year. The magic of it is you keep getting their repeatable revenue,
but only if you have a great product and a great experience. This is why the lifetime
value is so important, if you start to actually optimize on this, your business just gets stronger
and stronger and stronger. If you’re starting to get
this, if you’re starting to get excited about how to
track this, get your NPS going actually start taking a
more teaching methodology, so you can drive that loyalty, so you can drive that customer value and the lifetime value goes up. Are you starting to see this? Let me just get a yes
in the comments below so that I hear from you. And also link me to your SaaS business that you’re working on
that we can check you out. And I can I’d love to engage
more in the SaaS business that you’re building out as well. Before we go there’s the third one right, I promised you three strategies. This is my favorite one. Now the whole point of this,
is you want to reduce churn, you want to make sure
you have a great average of contract value, you
want to actually make sure you’re charging a profitable
price for your software. I want to do a separate
video just on pricing, because there’s so much to that. But the last strategy has more to do with impacting your net retention. The most successful SaaS business, if you look at Slack, if you look at Zoom, if you look at any number of them, really, one of the things that
they really have nailed is that over time, not only do
a certain cohort of customers an overwhelming number stay,
that’s the retention piece so churn goes down, but as
they use the product more and as they get more success,
the price that they pay every year or every month goes up. What that means is even though
a certain number of people might churn out, the people that stay, because they’re getting so much success, they end up paying more. What you want to make sure that you have, is you have a pricing model
that actually increases as the customers get more success. So for us, it was easy, we
just charged by the seat. And the more successful they
were with their platform, they wanted all of the sales people on it. And the more successful
they were using our platform in their sales, they actually
hired more salespeople. And so every year, we just
made more money out of them, but they were perfectly fine,
our customers were fine, because they were getting
value from the platform. And so in Marketo, it was
very similar, we didn’t charge by the seat, but we charged
based on the number of contacts or the database size. And that way every marketer
the more successful they were, they had more contacts in their database, and the more they paid for Marketo, but they’re happy to do it, because they were getting
success from the platform. So if you start to see
how this ties together. Number one, we really taught
them on how to use the product and actually get the result
they were looking for using our product. We taught them how to be successful, We didn’t just market to them,
we didn’t just sell to them. We actually created
resources that helped them activate more successfully. The second thing that we did is, we kept measuring the NPS score. We kept measuring the NPS score to understand how we’re doing. As a startup founder, you have two levers, either you’re shipping
codes or closing deals. Ship code, close deals,
that’s all that matters. But when you distill it
down, if you can ship code and close deals, you can measure whether that’s working or not. If you ship a bunch of
codes but if your NPS score doesn’t go up, if the deals don’t go up then it doesn’t matter, right? So when you actually measure
the NPS, we were able to say, “All right, how do we actually like, “is our teaching working? “Is our product working? “Or like what do we need to improve on?” It was, we were able to diagnose it. And then lastly, we baked
success into the pricing model. We made it where the
more successful they were using our product, we set a unit metric that were, the more successful they are, the more they would be
paying us over time. And that made it where over time, our customer lifetime value went up across three different spectrums. Number one, churn actually
reduced, so more people stayed. Number two, as more
people stayed we made sure that as they were more
successful, they had to pay more because that’s how the
pricing model worked. And number three, this is a pro tip here, we also made sure that
we focused our efforts on the segment of the market
that was most successful, where we got the most ACV. So we also tried to increase ACV. We did all three of those
things, we had better customers, well educated customers,
successful customers, that were paying us
more and staying longer, and because of all of that,
our customer lifetime value skyrocketed. And this I’ve seen every
single SaaS business. And it isn’t easy to do this. Like it’s a pretty simple framework, it isn’t easy to do though. Because you really got to dig
in and start to understand where are the levers
that really move this, and strategically put in the programs that helps drive it forward. So at least now you know why
this customer lifetime value is so important or the key
components that go into it. And my three strategies that
are going to help you actually increase your customer lifetime value. Something magical
happens when you actually increase your customer lifetime value. Because your customer
lifetime values is so high, you can actually spend a lot
more on acquiring customers. And when you can spend a
lot more acquiring customers and you can put more money
into events, dinners, brand marketing, new ads, all of it. And you can put more money into R and D. All these things become easier to do because you have the value
of a customer you know, is going to be so much higher. And guess what, when you
can do that your ability to raise money, or drive to profitability also becomes easier. This is why I truly believe
your customer lifetime value, this metric is one of the, if
not the most important metric to understand, measure
and have a strategy around in your SaaS business. So now you know everything
you need to know, almost about customer lifetime
value, but this is just one of the strategies I
talk about when it comes to growing SaaS businesses,
whether you’re just starting out trying to get to product market fit, or you’re a SaaS business
already generating revenues, you’re worried about growth. If you really want to dig into this more, I have created this unstoppable
guide to product market fit. In this guide, I give you the three things you absolutely need to
know in terms of creating this growth strategy and executing on it. So it’s completely free, you
can follow the link below. It will give you everything that I have in terms of a framework
to adopt to drive growth for your SaaS business. Since you’re here, be sure
to hit that Subscribe button and that Bell icon because
on the next episode, I’m going to be digging
more into what you can do once you actually have
CAC and LTV under control. And when you have these
SaaS metrics all mapped out, I’m going to start to give you
some of my playbook secrets on how I would drive growth
for your SaaS business once I diagnosed it. So be sure to hit the Subscribe
button in that Bell icon so that you get notified when I drop that episode next Sunday. Also, if you enjoyed
this video, it would mean the world to me, if you
hit that Like button. Just smash it. It means the world to me,
it means a lot to my team. It tells us that we’re
creating value for you. And if you’re part of a slack group or a group of startup
founders or an email list or whatever collaboration
channel, you’re on it would mean the world if you also share this video, because we want every SaaS
founder to be thinking about their customer lifetime value, customer acquisition costs and this core flywheel for their business. And remember, most importantly,
everyone needs a strategy for their life and their business. But when you are with us, yours
is going to be unstoppable. I’m TK and I will see you next Sunday. (whooshing) (upbeat music)

About Ralph Robinson

Read All Posts By Ralph Robinson

Leave a Reply

Your email address will not be published. Required fields are marked *