In SaaS, nothing holds your business together like metrics can. They are wonderful. Used right, metrics strengthens business operations with added transparency and control. In good hands, it can shed light on business weaknesses, pretty much like a giant MRI for your company.
Metrics, however, can also be abused, commandeered and watered-down to sugar-coat business reality. According to Bill Gurley in his Forbes.com article, many marketing departments hijack some metric formulas to fatten budgets and delay accountability, all the while sabotaging the business model with shoddy inputs.
One such metric is the LTV or the Lifetime Value/Lifetime Customer Value. The LTV is the net present value of a customer’s profit stream. The Lifetime Value formula or model is used to compare the costs of Subscriber Acquisition Costs versus the discounted positive cash flows coming from the customer’s lifetime relationship with the business. Because there is no constant as to how long the relationship will be, you can make a good estimate by stating the CLV as a periodic value; ie. We say “This customer’s 24-month CL V is $x”.
Image may be NSFW.
Clik here to view.
Is LTV Important?
LTV is an integral metric that you should track. When the data derived from LTV is used correctly, it can be a strategic tool that can be utilized for tactical monitoring of similar variable market programs across different channels.
Taking CLV into account can help you—as a SaaS entrepreneur—to think differently about customer acquisition. Instead of thinking about how to acquire customers as cheaply as possible, CLV will help you focus on optimizing your CAC or Customer Acquisition Cost to achieve the highest possible value, rather than getting the minimum cost.
As Hubspot’s Brad Coffey so wisely put it, “Put $1 in at the top of a machine and the LTV to CAC ratio will roughly tell you how many dollars will come out at the bottom. If you see that your money doesn’t multiply, you would need to invest in fine tuning that machine.
Nobody explains the importance of LTV better than the famous online ventures capitalist David Skok in his article here, where he says that the biggest reason why many SaaS startups fail is because their CAC vs CLV costs are unbalanced, and it looks like this:
Image may be NSFW.
Clik here to view.
The balanced model should look like this:
Image may be NSFW.
Clik here to view.
So what can you do?
Following the Hubspot case study on the use of LTV, let’s take a step back and talk about the 3 kung fu tricks you can use to effectively apply the balanced LTV formula to your business.
Kung Fu Trick #1: Put Customer Experience On Top of Your Priorities
This is not just a trick, but this should be your mantra. In fact, have it tattooed on your palm so you see it every day. Gaining your customers’ loyalty is the ONLY key you have to build a highly sustainable brand. It is your foundation to a stable and long-term business success.
Image may be NSFW.
Clik here to view.
But how do you win the love and loyalty of your customers?
Crowning your customers as “King” is not new, it’s a principle that’s been working for millennia now. But a loyal customer-base can significantly AND positively improve your LTV in two important ways:
- It decreases churn—we remember in our previous posts, the lower the churn, the better it is for your leverage.
- It does these 3 things:
- Improves the word-of-mouth marketing results of your company
- Tamps down the costs for unit marketing
- Spurs organic customer acquisition
In this trick, you should remember that your customer is your 1st, 2nd, and 3rd priority. Then you’ll have great LTV.
Kung Fu Trick #2: If You Want Your Acquisition Costs Down, Steer Clear Of Conventional Marketing
Don’t expect your LTV to scale up without a hitch. This is true especially if you are using conventional channels like Google Adwords, wherein the per-unit marketing costs increase when you spend more. According to Bill Gurley, the three most effective forms of marketing are:
- Viral marketing
- Social marketing
- Conventional media
Image may be NSFW.
Clik here to view.
He points out, however, that many companies focused on their LTVs tend to go for traditional marketing rather than invest in these high-leverage marketing techniques. At this point, the best way to go is to trade transparency for increased media mileage. Take advantage of the power of PR, and open your internal numbers so the press can talk about you and gain you valuable AND cheap media exposure. This transparency will not only let more people know about you, but also label your business as a brand with integrity.
Image may be NSFW.
Clik here to view.
Kung Fu Trick #3: Scale AFTER You Maximize Your LTV to A Point
Apart from capturing seed funding, you’d want to dilute your equity stake and accept growth capital so as to grab bigger opportunities and have bigger hands to quickly capture market share. LTV should be used primarily as a tool to help you determine whether your company is going to burn capital or if it is going to make a huge profit during that gold rush stage. Looking back at Brad Coffey’s example mentioned above, you can tweak the machine all you want for all eternity, but if the bottom is spewing out $20 for every $1 you throw on top, it sure is time to start scaling.
Image may be NSFW.
Clik here to view.
Final Thoughts
There are a multitude of methods you can use to improve your Customer Lifetime Value, but ultimately, the key is in creating the ideal balance in your business model that would allow you to offset the inevitable high cost factors that unavoidably comes with running a SaaS startup.
The post 3 Kung Fu Tricks To Optimize Your LTV and Maximize Your SaaS Business Potential appeared first on Abacus Metrics.