Customer Lifetime Value (CLV) is one of the most meaningful metrics for a SaaS business you can find. It can help you determine your customers’ loyalty, the potential revenues you might be able to generate from them and how far could you potentially invest in promotion to retain your customers.
For SaaS businesses it’s important not only to develop tools to measure CLV but also to define strategic goals for raising it. In this article we offer some of the best techniques to improve CLV with the use of customer service tools and techniques.
Let’s start by taking a look at the standard CLV formula:
CLV = Margin (€) * Retention (%) / (1 + Discount Rate (%) - Retention (%) )
The first conclusion one can reach from looking at this formula is that CLV is useful to figure the present value of the future cash flows attributed to the customer during the entire relationship with your company. By looking at a real example we can better understand how easy it really is to determine CLV. Example: Consider the average margin per customer per period as 200€, customer retention per period as 75% and discount rate per period of 10%. We then obtain a CLV of 428,57 €.
(Note: Calculating your Customer Retention Rate is also very easy. Use the number of customers you have at the end of a period (let's say, one year) minus the number of customers acquired during this period. Then, divide the result by the number of customers you had at the beginning of the year and multiply it by 100 to get the percentage value)
So you can see that there are two ways to increase Customer Lifetime Value: by raising your margins or by increasing your retention (as discount rate cannot generally be influenced).
Gains from measuring and monitoring CLV for SaaS businesses
By measuring CLV you can determine your top ceiling for customer acquisition investments, such as discount offers, sales and marketing expenses, etc. It’s also makes it possible to estimate the value of your lead collection process, the value of the leads you are collecting via different methods, pages or suppliers. CLV also allows you to differentiate and group different customer segments with similar buying patterns in order to standardize your investment possibilities into different levels.
How to use Customer Service to Improve CLV
So like we mentioned above, there are two methods to improve your CLV: raise your margins or improve retention. Let’s take a look at different ways we can use Customer Service to increase each of them.
To Raise Margins:
- Upsell and Cross-sell: One of the main benefits of customer service interactions are the unique opportunities it gives you to increase sales. Such opportunities arise from the fact that while you are giving support you are able to collect new information from the customer, such as preferences or wishes. Use this information to upsell current products or cross-sell related products or services in order to improve your CLV.
In a live chat conversation on your product page, for example, your visitor might indicate that she is worried about the laptop she is about to purchase damaging when taking it to work. Your service employee could use this information to recommend her a laptop cover, a specific laptop bag, and/or an extended product insurance.
- Compete on quality instead of price: Providing excellent support service is a differentiating element that can give you space to increase your prices without sacrificing market opportunities. A product raises in value when it is complemented with the right information, e.g. info on how and when to use it, common issues, etc. Customer service is the most friendly and memorable channel for this.\
- Collect Referrals: According to several experiments, customers who come through referrals or engage in customer referral programs tend to show a 20% higher loyalty than non-referred, giving them a higher retention rate. Use your customer service channels to ask for referrals or leads that might be interested in your service or products.
- Raise SaaS Conversion Rates: Providing customer service is a great push into improving your conversion rates. A study conducted by Sandhill showed that for a set of SaaS the number of trials increased, as well as the trial/free user to paid customer conversion, for companies who implemented close customer support. (http://sandhill.com/article/saas-metrics-three-steps-to-success/).
To Raise Retention:
- Set up Account Managers: These people advise the customers on how to get the most out of your product. Adding an account manager thus increases the value of your product and raises the likeliness that your product fits your customer’s needs. Having an account manager is also perceived as a high value service from the customer perspective, which translates in loyalty and retention.
- Getting in touch with Inactive Users: Use your customer service tools to get in touch with those who haven’t been using your software lately. First, try to understand why this is happening and then provide necessary support to bring them back, before it’s too late.
- Collect Feedback: After each sale or transaction, make sure you collect feedback from the customer. Consider using an on-site form or a simple follow-up and satisfaction email. For more valuable clients or transactions it is also possible to schedule feedback calls. Customers appreciate the effort and their loyalty to your company can be positively impacted, increasing the retention rate and their satisfaction with your product. Don’t be afraid that you might ‘bother’ your customers. Everyone likes to feel important, so as long as you make your customers feel that way it should be ok.
- Feature Requests: You can also use your customer support channels to collect feature suggestions from your current or potential users. Once you have implemented such features, remember to get back to the users from whom the request originated. Their response in loyalty and goodwill is priceless.
- Implement Live Chat in the Backend: By adding live chat to your dashboard or backend platform you can guide users directly and on-site through your product. Doing so increases the direct value of your product since your users are more likely to get the most out of it, similar to the effect of an account manager. Together with the increased perception in service value this leads to a higher retention rate. From another perspective, it also reduces clutter in other support channels, which allows you to improve your productivity and margins.