This post is by Joel York from Chaotic Flow by Joel York
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What’s the stronger driver of SaaS company growth: customer acquisition or customer lifetime value? The answer is yes. Rapid, sustainable SaaS growth is equal parts customer acquisition and customer lifetime value. Simply multiply these two numbers and you get your SaaS growth ceiling, the most revenue your SaaS business can ever achieve. Period. The end. If you want to change your future, you have to change one of these numbers. However, most SaaS marketing professionals think their job ends at purchase. In SaaS, the intital purchase is only the first of many. Keeping each and every customer around longer and making the most of the business relationship along the way has as much impact on SaaS company growth as acquiring more customers. Therefore, good SaaS marketing lasts a customer lifetime.
This is the third post in a series that paves the path to sustainable SaaS growth. The first post in this series introduced the three fundamental levers of SaaS growth: customer acquisition, customer lifetime value and viral customer network effects. This installment explores the second lever and provides three proven SaaS marketing strategies to drive SaaS growth by maximizing customer lifetime value.
Two Views of Customer Lifetime Value
There are two sides to every purchase: buyer and seller. Maximizing customer lifetime value isn’t something you do to a customer, it’s something you do for a customer. In SaaS, customer lifetime value is often expressed as average recurring revenue times the average customer lifetime (one divided by percentage churn rate), however, this is only the sellers side of the coin. When thinking about what you can do to maximize customer lifetime value, it is a good habit to think about it from your customer’s point-of-view. For example, reducing churn means giving your customer a reason to stick around, while upselling and cross-selling mean solving more problems, incresing satisfaction, and providing greater ROI. Getting paid is just an end to the means.
SaaS Marketing Strategy #5 | Reduce Churn
There is only one SaaS marketing strategy to reduce churn: increase use. The more customers use your product, the less likely they are to stop using it. Most SaaS churn problems can be traced back to a SaaS marketing strategy focused exclusively on customer acquisition at the expense of ongoing use. Unfortunately, SaaS has a very short shelf life.
Some people think SaaS churn is something that happens when a customer comes up for renewal, it isn’t. The causes of SaaS churn occur much earlier in the customer lifecycle; cancellation is simply the finale. The battle against SaaS churn begins in product design. Long before a SaaS customer decides to cancel, a SaaS marketing professional decides to create a product that is hard to adopt and easy to switch by paying more attention to product features than to customer value that encourages expanded and habitual use. As use increases, customers transform your product into their product by investing in personalized configuration, user generated content, deeper learning and business process automation. Your SaaS product should be designed to increase in value with use by making it easy to explore and easy to personalize. For example, a SaaS product that is fully configured to enable a customer’s business processes and retains historical data is far more valuable after five years of use than it is right out of the box. Unused features have zero customer value and zero stickiness.
Your SaaS marketing strategy should extend beyond purchase to facilitate onboarding and encourage deeper and deeper use of your product. The same SaaS marketing tactics applied in customer acquistion: educational content, marketing automation and engagement metrics are equally important in churn reduction. But, don’t stop there. Post-acquisition, you gain access to an entirely new and extremely effective SaaS marketing channel: your product. Unlike other products, SaaS offers a direct, dynamic, personalized, two-way communication channel with your customer. Every click indicates a potential need, and every need presents an opportunity for communication that promotes use. The more your customers use your product, the more they value it and the higher your customer lifetime value. Unfortunately, the converse of this is also true. The less customers use your product, the less they value it and the more likely they are to churn.
SaaS Marketing Strategy #6 | Upsell
If you’ve managed to keep your customer’s from churning, then the next step up on the SaaS marketing pyramid is upselling. Upselling is usually defined as selling more of the same product to the same customer. In SaaS, this translates to more use by more users for more money. If reducing churn is about finding more value, upselling is about creating more value. Customer value in SaaS is a continuum that can be measured by use. Reducing churn is about preventing the flow in the wrong direction, less use. Upselling is about accelerating the flow in the right direction, more use.
Like churn, upselling begins in product design. Well-designed SaaS products upsell themselves. Customers simply discover more features and add more users until they hit a new pricing level, and then upgrade seamlessly by clicking a button. That doesn’t mean you can’t help them along the way. Since a price must be paid, strong SaaS marketing is even more essential to upselling than it is to churn. A customer must not only want to use a new feature, but must be willing to pay for it. While churn reducing SaaS marketing programs can focus exclusively on users and use, upselling must also target decision makers and present clear business value.
Upselling is particularly attractive when your SaaS product has an unconstrained dimension of use, as in anybody can use it or they just can’t get enough of it. For example, collaboration and personal productivity tools can be used by anyone, which means an inital 5 user purchase might eventually turn into a 5,000 user purchase. Alternatively, cloud computing and advertising products might have only a single user, but can scale indefinitely with that user’s budget. A common SaaS marketing mistake is to create pricing structures based on functional or technological modules. When putting together your upsell SaaS marketing strategy, don’t align your pricing with your technology, align your pricing with customer value along dimensions of increasing use. And, maximize upsell potential along your least constrained dimensions of use.
SaaS Marketing Strategy #7 | Cross-sell
If you aren’t lucky enough to be selling a SaaS product with unlimited upsell potential, then it might be time to move your way up the SaaS marketing pyramid to cross-selling. Cross-selling is usually defined as selling a new product to an old customer or an old product to a new customer. When creating your cross-selling SaaS marketing strategy, the golden rule is don’t stray too far from home. Pick new products that complement and increase the value of your old products and new customers that have personal business relationships with your old customers, e.g., the department next door. The whole point of cross-selling is that it should be easier and cheaper than acquisition, because it leverages your current customer relationship. Stray too far from home and you lose this leverage. For this reason, cross-selling is often the most illusory SaaS marketing strategy. Just because you have another product to sell, doesn’t mean your customer wants to buy it.
While rarer than unlimited upsells, some SaaS products do have seamingly unlimited cross-sell potential. Some SaaS vendors have the opportunity to create large product catalogs consisting of many similar, complementary packages, such as ERP systems, office productivity suites, and cloud platform APIs. Cross-selling to new customers has the most upside when you are targeting markets composed of highly fragmented, independent buyers with strong industry relationsips. In this scenario, leveraging current customer referrals to get to new prospects becomes an essential cross-sell SaaS marketing strategy. When customer referrals take on a life of their own, cross-selling crosses over into viral marketing, which just happens to be the subject of SaaS Marketing Strategies 8-10 in the next installment of this series on driving sustainable SaaS growth. Stay tuned!
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