Customer lifetime value is a common buzzword heard in the world of sales and marketing. Yet it’s also a vital metric for SaaS businesses to track if they hope to achieve robust customer retention and stable profit margins.
Not to mention, CLV helps you to make informed business decisions about how to allocate resources to areas such as marketing, product development, customer support, loyalty management, and more. .
Maximizing CLV involves identifying key touchpoints in the SaaS customer journey, and leveraging them to transform potential customers into dedicated advocates. In this blog, we’re going to cover what customer lifetime value is, how it influences the SaaS customer journey, and how software companies can increase CLV by enhancing the user experience.
- Customer Lifetime Value (CLV) is a crucial metric for SaaS businesses, indicating the net profit expected from a customer’s relationship with a brand over time, influenced by purchase frequency, order value, and acquisition cost.
- The SaaS customer journey comprises the stages of awareness, consideration, decision, retention, and advocacy. To increase CLV, businesses must optimize key touchpoints across these stages such as website visits, customer support, feedback, and loyalty programs.
- Strategies to increase CLV include building strong customer relationships, implementing a robust customer success strategy, offering appropriate pricing models, and more.
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What is Customer Lifetime Value?
Customer Lifetime Value (CLV) is an important metric in SaaS, eCommerce, and retail that measures the profit that a business can expect to earn from a single customer over the duration of their relationship with a brand. This takes into account factors like average purchase frequency, average order value, and customer acquisition cost.
Put simply, CLV tells you how effectively you are realizing potential revenue. When CLV is low, this can be a sign that a large number of customers feel unsatisfied with your product or service, or aren’t being supported well enough to maximize their investment. Meanwhile, a high CLV indicates that you are retaining customers and finding ways to boost average revenue per customer.
Calculating customer lifetime value can be done in several ways. A basic customer lifetime value formula gives you an overview of CLV across your customer base for a defined time period:
CLV formula = (average revenue per user (ARPU) x (gross margin) / (churn rate)
SaaS brands can also use more granular customer lifetime value calculations if they want to segment their customers into different cohorts, or calculate predictive customer lifetime value.
Understanding the SaaS Customer Journey
Knowing how potential customers navigate the process from looking for a solution to becoming brand loyal is essential to acquiring customers—and in keeping them. While there may be some variations depending on the business model, the SaaS customer journey can be broken down into five distinct stages, which are:
Awareness. To become a loyal customer, consumers first need to recognize a need or pain point and begin looking for solutions to address it. Whether a potential customer will discover your SaaS product depends on effective outreach and marketing strategies such as social media, blogs, webinars, and paid advertising.
Consideration. This is the phase when consumers start comparing different SaaS solutions to determine which offers the best fit for their needs. This process involves learning about features, pricing models, and finding reliable testimonials. Businesses need to pay close attention to prospects during this phase and proactively engage with them for the best chance of conversion.
Decision. Once a customer has narrowed down the number of options available, they’ll want to examine the remaining solutions in more depth before they are ready to commit to a subscription. This could involve reading success stories from businesses in their verticals, testing product demos, and engaging with sales reps to ask more technical questions.
Retention. Once a customer has been onboarded, SaaS providers need to keep engaging with their users to ensure they are fulfilling their core value proposition. Customer retention is made easier when users can access rapid customer support, provide feedback on new updates, and enjoy a product that’s continuously being refined.
Advocacy. When customer satisfaction and brand loyalty are high, customers are more likely to recommend your solution to others and participate in referral initiatives. These customers are highly valuable in growing your business, as buyers trust the testimonials of other users far more than a brand’s own marketing efforts. With a high number of advocates on your side, generating new leads becomes more cost-effective.
To improve CLV, SaaS businesses need to identify the key touchpoints in each of these stages that help to transform interested consumers into loyal brand advocates. By investing in these touchpoints and creating more positive customer interactions, you can find more opportunities to increase lifetime value. Common touchpoints that influence CLV include:
- Website visits
- Customer support
- Feedback and surveys
- Referral programs
- Product updates
- Loyalty programs
How to Increase Customer Lifetime Value
Let’s dive into these touchpoints in more depth to understand how they can improve lifetime value.
Build strong relationships
Customer relationships are at the core of any successful business. As customer acquisition cost (CAC) rises, it’s no longer possible to achieve robust growth via customer acquisition alone.
Strong relationships go far beyond transactions and subscription renewals; SaaS companies need to ensure that existing customers feel supported and valued if they are to continue being customers, which makes customer retention central to increasing CLV.
Your interactions with customers should focus on creating long-lasting loyalty that drives repeat business and lowers your churn rate, in turn increasing the average customer lifespan.
Investing in personalization allows SaaS businesses to tailor their offerings to individual customer needs, preferences, and pain points by gathering valuable customer data on the user experience. For example, when a new customer signs up for a plan, you can ask them questions about their intended use of your software during the set-up phase. This enables you to tailor the onboarding process to focus on specific features that are relevant to their needs.
Personalization should be reinforced with effective communication strategies, such as regular email updates, proactive customer support, and user surveys that ask for feedback about their experience. This helps to build trust and improve customer satisfaction over time.
Implement a robust customer success strategy
Current customers don’t only need to be nurtured to subscribe; they need to be nurtured to stay engaged and satisfied with what you offer. If customers feel neglected by a SaaS provider they’re not likely to stay committed for long, which causes LTV to tumble.
Customer success is a strategic approach that focuses on building customer loyalty and satisfaction over the long term. With a dedicated customer success team to hand, SaaS businesses can focus resources on boosting customer retention rates by ensuring customers are achieving their desired outcomes.
You can support your customer base by providing a personalized onboarding experience and ongoing guidance dedicated to their needs. Monitor customer behavior to identify customers who may be underutilizing your product and are at risk of churn. Regularly sending out educational content, such as webinars, tutorials, and help guides, empowers customers to maximize their subscriptions.
Offer the right pricing model
How you price your software product has a massive influence on the lifetime value of a customer – not to mention your bottom line. Common SaaS pricing models include:
- Tiered pricing
- Flat-rate pricing
- Feature-based pricing
- Usage-based Pricing
- Freemium pricing
Offering multiple pricing plans gives customers choice and flexibility depending on their transaction volumes, which features they require, and how many user seats they need, among other considerations. Aligning your tiers with key customer segments ensures you are addressing key user needs and pain points, as well as providing robust upselling and cross-selling opportunities.
Add-Ons for specific features and services are another great option to consider, as this allows customers to customize their plans and pay for only what they need, while still increasing total revenue.
It’s important to remember that customer needs will shift over time, so you need to make it as easy as possible for them to change plans with minimal friction. Smooth transitions between plans and tiers will help CLV to grow over time while also minimizing churn.
Offer features and services that add immense value
A good place to start is by building an expanded ecosystem that brings together complementary features and services across a specific vertical. Creating an all-in-one SaaS solution streamlines workflows and minimizes the need for customers to seek alternative tools or integrations to get their tasks done.
For example, SaaS companies regularly offer integrated features such as payment processing or loyalty management, since the businesses who use their products may also have a need for these services. For example, Stax offers Stax Connect as an integrated payment processing functionality for merchants to add to their existing tech stack.
Encourage customer advocacy and referrals
Your best customers aren’t always those who spend the largest amount of money. Rather, the highest levels of CLTV are seen in customers who spend the most time telling other consumers about your solution.
By turning customers into advocates, you can create a self-perpetuating cycle of growth for your business that turbocharges lifetime value.
Brand advocacy is linked with high CLV because your most valuable customers attract new customers via activities such as leaving reviews and making referrals. According to Power Reviews, 98% of consumers feel that reviews are an essential resource when making purchase decisions
However, businesses cannot expect customers to undertake these efforts organically; to turn high-value customers into true brand advocates, you need to provide the right set of incentives.
A formal referral program enables you to reward customers when they bring in new business, as well as the incoming customers they’ve invited. Incentives include discounts, access to services in beta testing, or free plan upgrades to motivate customers to refer others.
Invest in continuous product improvement
Creating a SaaS product is not a ‘one and done’ process of development. To stay relevant, businesses must ensure their product continues to evolve and adapt to changing customer needs. The customer experience may suffer if your service no longer delivers the same level of value, or hasn’t kept up with changing market trends.
To continue refining your product, you need to understand what your customers are looking for and prioritize developing these areas. Run regular surveys to gather customer feedback on pain points they’ve encountered using your service, any product gaps, and what features they would most like to see added. It’s also important to keep a close eye on what your competitors are doing, as this could impact CLV if customers are being lured away by compelling new features.
It’s essential that your development cycle aligns with the needs of your customers, as well as your own marketing efforts. Long, drawn-out cycles risk frustrating customers, compared to smaller, more frequent updates that keep your product fresh and interesting. Something as minor as a new filter to help organize data can make a huge difference to customer satisfaction and lengthening the customer lifecycle.
Create loyalty programs and incentives
Loyalty programs are designed to segment your most loyal customers by recognizing and rewarding their value to your business. As opposed to ‘earn and burn’ rewards initiatives, an effective loyalty program fosters long-term engagement via incentives that encourage behaviors advantageous to your business, which increases CLV over the long term.
For example, rewarding customers with loyalty points or discounts when they complete a survey gives SaaS businesses valuable customer data to help refine their product and CRM strategy. You can also offer special discounts for customers who renew their subscriptions early or subscribe for longer periods of time, helping to reduce customer churn.
A tiered loyalty program is another option that allows customers to earn points based on their usage, tenure, or spending. Each tier unlocks escalating benefits for the highest-value customers, which can include priority customer support, early access to new features, upgrading plans at a discounted rate, and more.
For best results, continuously monitor your loyalty program to see whether it’s achieving your objectives. Be open to customer feedback about what rewards they would like so you can keep refining your program for the best results.
CLV not only identifies ways to increase revenue, but helps SaaS businesses to allocate resources to initiatives that are effective at boost customer retention. Each stage of the SaaS customer journey – Awareness, Consideration, Decision, Retention, and Advocacy – hold pivotal touchpoints that can be leveraged to convert prospects into dedicated brand advocates who build recurring revenue for your business.
These touchpoints include building strong customer relationships through personalization, implementing robust customer success strategies, offering the right pricing model, providing valuable features, encouraging customer advocacy, investing in continuous product improvement, and loyalty programs.
Armed with these insights, it’s time to transform your SaaS business and begin developing your own set of CLV strategies. For more about preparing your SaaS solution for better customer experiences, check out Stax Connect.
FAQs about Customer Lifetime Value (CLV)
Q: What is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) is a critical metric used in SaaS, eCommerce, and retail to gauge the profit that a business can expect to earn from a single customer throughout the duration of their relationship with the brand. CLV takes into account factors like average purchase frequency, average order value, and customer acquisition cost. A high CLV intimates good customer retention and effective ways to boost average revenue per customer.
Q: How is Customer Lifetime Value calculated?
Calculating customer lifetime value varies, but a simple approach involves an overview of CLV across your customer base for a defined time period:
CLV formula = (average revenue per user (ARPU) x (gross margin) / churn rate
Q: What does the SaaS Customer Journey comprise?
The SaaS customer journey comprises five distinct stages: Awareness, Consideration, Decision, Retention, and Advocacy. Each stage is essential for acquiring and retaining customers.
Q: What are the strategies to increase Customer Lifetime Value?
Some strategies to increase CLV include building strong customer relationships, implementing a robust customer success strategy, offering appropriate pricing models, offering features and services that add immense value, encouraging customer advocacy and referrals, investing in continuous product improvement, and creating loyalty programs and incentives.
Q: How can businesses build strong customer relationships to increase CLV?
Businesses can build strong customer relationships to increase CLV by focusing on fostering long-lasting loyalty that drives repeat business and lowers the churn rate. This can be achieved by personalizing the business offerings to fit individual customer needs, preferences, and pain points. Effective communication strategies, such as regular email updates, proactive customer support, and user surveys that ask for feedback about their experience, also contribute to building rapport with the customers.
Q: How does the right pricing model influence CLV?
The pricing model of your software product has a significant influence on the lifetime value of a customer. Offering multiple pricing plans gives customers choice and flexibility, caters to various customer segments, and provides opportunities for upselling and cross-selling. Add-Ons for specific features and services allow customers to pay for only what they need, while increasing total revenue.
Q: How do loyalty programs and incentives help in increasing CLV?
Loyalty programs recognize and reward the most loyal customers, fostering long-term engagement via incentives that encourage behaviors advantageous to your business, such as renewing subscriptions early or subscribing for longer periods. This helps in increasing CLV over the long term. A tiered loyalty program, for example, unlocks escalating benefits for the highest-value customers, such as priority customer support, early access to new features, and upgrading plans at a discounted rate.
Q: Why is customer advocacy important for increasing CLV?
Satisfied customers who recommend your solution to others, participate in referral initiatives, and leave reviews make up your most valuable customers. They attract new customers, contributing to a self-perpetuating cycle of growth for your business. Therefore, turning customers into advocates by providing the right set of incentives through a formal referral program significantly helps in increasing CLV.
Q: How does continuous product improvement contribute to increasing CLV?
Continuous product improvement ensures that your service delivers the same level of value and stays up-to-date with changing market trends, thereby preventing customers from being lured away by compelling new features from competitors. Further, understanding your customers’ needs and refining your product accordingly can greatly enhance customer satisfaction and extend the customer lifecycle.