SaaS companies and the vast majority of businesses rely on customers to maintain their bottom line, but revenue seems to be the primary metric most startups focus on. While revenue is the primary reason companies succeed, replacing customers or waning loyalty can tank a business. In the end, emphasizing customer lifetime value will boost all metrics.
Customer Lifetime Value and How to Calculate Performance
A customer’s lifetime value (CLVY or CLV) is an important metric that represents revenue over the relationship with the consumer or over a period. Since SaaS companies offer subscription-based software that benefits a business, CLV can determine how much is gained if a customer stays subscribed. SaaS businesses use the following equation to determine CLV.
CLV = [0.5 * 1 / churn * (2 * ARPA + ARPA_growth * (1 / churn – 1))] * margin
Churn is the annual percentage rate at which a customer stops subscribing, whereas the ARPA is the average revenue earned per account. If your business has different subscription tiers, you’ll need to add all active subscriptions and divide them by the number of subscriptions in the set.
Customer Lifetime Value From a SaaS Perspective
As mentioned, churn is the rate you lose customers, and CLV is the number of customers your company retains. A low churn rate is beneficial for your business as that means you maintain more monthly subscribers and more revenue. Customer retention in companies that rely on a subscription service is critical because a continued relationship will help maintain profits.
SaaS companies can determine whether or not they’re providing value to their customers by looking at reviews and their retention rate. A company that receives a large amount of complaints about the services offered will lose subscribers and have a hard time gaining new ones. To raise CLV, SaaS companies need to improve their features and add new ones.
It costs money to attract new customers to your business, but if your CLV is high, then you can balance out your costs. While maximizing CLV can be difficult in a competitive market, you need to divert eyes from your competition by keeping your customers engaged with your product.
How SaaS Companies Can Improve Their CLV
SaaS companies will see their CLV suffer if they avoid contact with their customers after the conversion stage. Your competitors will still promote their services to your converted buyers and may coerce them into their SaaS programs instead. To prevent this, try the following.
Simplify Onboarding
Your products are supposed to make your client’s lives easier, but with a poor onboarding process, you’ll quickly lose subscribers. It won’t matter if your product is the best on the market if no one can use it, so provide your customers with a product tour, interactive videos, and personalized onboarding procedures. Test onboarding approaches to improve this process.
Customer Support
Even the best onboarding processes can’t account for everything. However, if you provide fantastic customer support options, your buyers will stick with you for longer. Use all channels available to you like social media, email, phone, and live chat to quickly interact with your customers. Staff employees who are personable and great problem solvers.
Social Proof
Even multi-million dollar companies can’t stop the process of asking for reviews because a single PR debacle can ruin your reputation for good. To improve CLV in the long term, SaaS businesses must ask customers for feedback to stay competitive. Be sure to act upon feedback, as that shows your buyers that you care about their personal needs and business scalability.
Use Emails
SaaS companies can remain in good standing with their customers by speaking to them regularly via social media or emails. However, email is where businesses can make their biggest gains because it’s a direct link to the customer. Welcome emails, for example, can provide links to articles about the product or blogs that expand customer knowledge.
