The math behind successful as-a-service series: lifetime value
In the third part of our series ‘The math behind successful as-a-service,’ we’re diving into lifetime value: what it is, why it matters, and how it can help shape your company’s strategy.
What is lifetime value?
Customer lifetime value (CLV)—or lifetime value (LTV) for short—is the total amount of potential revenue a customer could generate throughout their relationship with your company. The ‘lifetime’ refers to the span of your working relationship. In the technology industry, where many service providers rely on a recurring revenue model, LTV is an especially important metric. When evaluated alongside customer acquisition cost (CAC), LTV is a key performance indicator (KPI) that lets your business determine the value of each customer.
Why does your customer lifetime value matter?
In short, it’s easier to maintain existing client relationships than it is to initiate new ones. And with new customer acquisition costing up to 25x more than customer retention, it’s also more cost effective. Recognizing this, many companies today are investing heavily in client retention—rightfully viewing customer relationships as long term investments worthy of time, resources, and maintenance.
That being said, not all customer relationships are created equal—and not all of them will have the same impact on your bottom line. By looking at LTV, you can see which customers are strong, recurring sources of revenue, and which are more expensive to service—potentially costing you money. For subscription-based service providers, a firm grasp on LTV is a must.
How do you calculate lifetime value?
The customer lifetime value formula is as follows:
The LTV metric is most telling when it’s evaluated alongside CAC. After all, to know how much revenue a client generates, you also need to know how much it costs to reel them in in the first place. To get the full picture, you can look at your LTV to CAC ratio.
- The ideal ratio is 3:1.
- If it’s less than 1:1, the client is costing you money—meaning something needs to change quickly.
- If the ratio is 1:1, you’re breaking even.
- When you reach figures like 4:1 or 5:1, those relationships can be too profitable, and you may want to consider investing more of your time and resources into marketing and growth.
You have these metrics, now you need to track and easily report on them. With ConnectWise PSA™ (formerly Manage) and BrightGauge®, a ConnectWise solution, you can easily track your LTV and other important KPIs through real-time dashboards. With the right information, your business decisions are driven and informed by data.
The ConnectWise PSA and BrightGauge integration comes packed with pre-loaded KPIs and dashboards and report templates, so you can get right to your data on day one.
How to improve your customer retention strategy
With profitable clients—especially those in the 3:1 LTV to CAC sweet spot—the longer the relationship, the better. Here are some ways to drive customer retention:
- Check in. To show your clients that you’re invested in their long term success, check in with them on a regular basis by scheduling quarterly reviews, recognizing your service anniversary, and staying on top of account renewals. By touching base with profitable clients, you can ensure their satisfaction—and create new opportunities, too.
- Align expectations. Before you can meet expectations, you need to set them—clearly and collaboratively. At the beginning of your working relationship, establish clear service-level agreements (SLAs) with clients to make sure you and your client have a solid roadmap for achieving your goals.
- Be proactive. You want clients to see you as an expert. To prove your knowledge, anticipate client needs before they even arise—whether that means assessing risks or scoping out potential upgrades.
- Provide great customer service. You want customers to see you as an indispensable part of their operation. With an outcome-oriented approach that anticipates and solves issues, you can provide service so good that customers don’t give renewals a second thought.
Upselling and cross-selling opportunities
With most clients, there’s probably room for your relationship to grow, whether that’s providing additional services or enhancing existing ones. Because you communicate with customers frequently, you have the perfect opportunity to make the kinds of suggestions that expand your relationship. By upselling and cross-selling to existing clients, you can capitalize on the fact that you’ve already established trust—and can jump freely to sales.
What is upselling?
Upselling is when you sell enhanced products or services to an existing client. For example, if a customer plans to purchase a laptop from a company, that company can upsell them by suggesting a version with more storage. Upselling builds on sales that customers would already make.
What is cross-selling?
Cross-selling is when you sell additional products or services to an existing client. For instance, if a customer is purchasing a laptop, an employee could cross sell to them by suggesting that they buy a laptop bag or screen protector along with it.
Tips for successful upselling and cross-selling
- Start with your base. Regular, loyal customers are the ones most likely to be receptive to your sales suggestions, and they’re also the customers whose needs you’re most familiar with.
- Offer a trial. Show, don’t tell—and prove to customers that additional or expanded services will make a measurable positive impact on their business. With a limited-time trial, you can demonstrate to clients just how much more they could be getting from you.
- Create incentives. Offer existing clients a discount or a bundle and show them that you value their business and are invested in the relationship.
- Prove the value. With permission from clients who have seen great results with your services, write case studies that prove just how much expanded or added services can help a business—preferably with metrics to back them up.
- Build (and maintain) trust. If you’ve been working with your customers for a long time, they probably trust you—and that trust isn’t something you want to take for granted. As such, you should always be sincere in your upselling and cross-selling suggestions, making sure that you’re offering a necessary benefit to your clients.
Cross-selling and upselling aren’t just ways to drive revenue, they’re also opportunities to strengthen and deepen your customer relationships. To keep LTVs high, you want to keep valuable customers around for as long as possible—and adding and expanding services is a great way to do that.