How to Maximize Customer LTV in SaaS
Customer lifetime value (CLTV) may be known by different abbreviations — CLV or just LTV — in the SaaS world, but the metric couldn’t be more singular in what it measures. CLTV is the total amount of revenue you can expect to earn from a customer during the course of their relationship with you.
LTV is a “forward-looking metric,” meaning it helps you make smarter decisions about which customer relationships to invest in so that you acquire (and retain) customers with the highest lifetime value.
The growth of your SaaS business depends on how high your average LTV is, especially for your high-value accounts, and how low your customer acquisition costs (CAC) are. A high LTV, in turn, depends on factors like identifying your ideal customer, keeping customers committed to their goals, preventing involuntary churn, offering scalable pricing, and instituting a strong onboarding process.
Identify your ideal customer profile (ICP) to ensure you acquire good-fit customers
An ICP describes the characteristics of accounts that are likely to become the most valuable customers for your business and the ones you should chase and retain. It informs your understanding of who your customer is, what their goals are, and how your product will help them achieve those goals.
In high-growth SaaS companies, the ICP is at the core of marketing and sales strategies because it primarily helps you classify customers into high-value and low-value segments. Once you have this in place, you can customize marketing plans based on the expected value from those accounts and build repeatable strategies to convert top accounts and boost your LTV.
An ICP shouldn’t be a complex document with too broad a scope. In fact, a focused ICP makes it easier for your sales and marketing teams to devise key downstream strategies. But an ICP needs to go beyond automated data and spreadsheets. The best way to identify and document your ICP is by staying close and talking to your customers. Set up in-person interviews, engage in their social media posts, and learn about their goals and experiences with different products.
When you talk to them, you’re able to answer fundamental questions related to the industry they work in, their business model, which revenue band they fall into within your company, and the current technologies they use to run their company. This knowledge inventory can then go into a living, breathing document that changes and evolves along with your customers and their use cases. It helps you stay on track with customers and makes them stick around longer.
With the internal and external data you collect, you’re able to target the right customers instead of wasting time on ones that’ll eventually churn because they weren’t ever going to derive value. If the ICP is poorly understood or unclear, your sales and marketing teams will be left barking up the wrong tree, wasting their time and efforts on customers who weren’t a great fit to begin with.
Set up a payment system that mitigates involuntary churn
Involuntary churn happens when a customer didn’t choose to end their subscription, but the credit card payment failed to go through. A credit card payment can be declined for a number of reasons, such as an expired credit card, a lost or stolen credit card, incorrect billing information, or maxed out limits on credit.
On average, SaaS companies lose 9% of their monthly recurring revenue to involuntary churn, which makes it an unnecessary and highly avoidable dent in your LTV. It is a circumstance where customers don’t intend to cancel and may even be gaining value from your product, but a technical issue nudges them off your revenue stream.
SaaS companies typically use automated solutions to combat involuntary churn, but that recoups only 15-20% of the precious business lost. This is because it’s easy for automated emails to land up in the ignore or “do-it-later” folder. While you should still lean on technology to set up automated renewal reminders and paywalls, we suggest a hybrid approach that brings in dependable human effort to mitigate this type of churn.
For example, with a tool like Gravy, you buy a package with retention specialists who use technology to set off an alert on failed payments. They then personally reach out and get the customer’s information updated, even offering “stay bonuses” to clients who otherwise may not bother to come back.
Use value metrics to provide scalable pricing packages to customers
A value metric informs the price of your product or service. It is based on the customer’s perceived value of your product and whether they think paying the price is justified in exchange for the product or service you provide. You need to come up with a standardized model that aligns value with pricing by understanding your customers and their needs. When customers see they’re getting their money’s worth, they stick around longer and provide a healthy LTV.
For example, imagine you’re selling sandwiches, and a customer regularly buys 20 sandwiches for their sales team because they go out in the field and are bound to come back hungry. But sandwiches are universally loved and used. The rest of their teams can get value out of sandwiches, too. The sales department may need 20, while the accounts and HR teams need 10 each. The perceived value of your product goes up because leadership sees it being utilized across departments and is more willing to pay. So instead of selling per user, if your pricing is based on this perceived value, you can provide sandwiches for the entire company at a higher price point while continuing to improve your product with additional features and quality checks. The usage across the company also makes it difficult to switch to another product and helps extend your customer LTV.
The key is to remember to keep your pricing packages simple and easy to understand so that the customer is clear on the corresponding value they will receive with each price tier. One way to do that is to get creative by naming your packages and tying them to human experiences, like walk, jog, and run, that are self-explanatory and point to the incremental value of the product.
Provide an onboarding experience that balances quick wins and long-term customer value
An average of 23% of customer churn results from poor onboarding because customers are either unaware or unable to identify the value proposition of your product. Onboarding is your chance to prime the customer for a quick win and set the momentum for a value-laden journey toward their goals.
Onboarding isn’t about just educating your customers on product features and linking them up with how-to videos. You need to collaborate with them to build a roadmap that will help achieve their long-term goals while celebrating smaller wins along the way. But to arrive at the wins, you have to give and take responsibility for the goals. Create a tight focus and a commitment to meeting deadlines so that both you and the customer stay accountable. Then you can celebrate the small wins so that customers recognize the value they derive from your product and are excited to spend time with it to gain even more value.
Have an onboarding checklist that helps you set clear expectations and align on customer commitments. But even the best checklists cannot replace human conversation and true collaboration. Customer portals help you keep track of progress during onboarding and beyond and to visually confirm (by checking off a box) with your customers if they agree. You (or the customer) are able to mark wins for future reference, provide feedback in an adjacent thread, and continue on the journey.
Pick the right tool to help maximize customer LTV for your SaaS company
You want to keep your high-value customers close because they are the ones that provide the highest LTV. A project management tool that focuses on collaboration and customer success is the one you need to ensure your customers remain loyal and scale along with your business.