- 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)
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