Have you ever wondered what metrics really matter to your business success? In SaaS - Software as a Service - there are over 50 metrics you could measure, but only a handful are important.
Today I will show you one metric that you must know. A metric that will tell you immediately if your business is going to be successful - and I'll give you three tips on how to improve this metric.
Let's dive right in!
Today I will show you one metric that you must know. A metric that will tell you immediately if your business is going to be successful - and I'll give you three tips on how to improve this metric.
Let's dive right in!
The #1 business metric you must measure
In business, there are a ton of metrics you could measure. You've probably heard of conversion rate, churn rate, expansion revenue, quality of leads and so on. There are a lot of them - in fact, there are more than 50 SaaS metrics you could measure.
However, very few of your day-to-day metrics have any real business impact, and most of them require you to dig deeper to find out what they really mean in your business.
But I want to show you one really powerful metric in SaaS, one that will tell you instantly whether your business will be successful or not. Well, to be fair, it's not really a metric; it's a ratio, because it's a combination of two metrics.
The ratio I am talking about is the customer lifetime value to customer acquisition cost ratio.
However, very few of your day-to-day metrics have any real business impact, and most of them require you to dig deeper to find out what they really mean in your business.
But I want to show you one really powerful metric in SaaS, one that will tell you instantly whether your business will be successful or not. Well, to be fair, it's not really a metric; it's a ratio, because it's a combination of two metrics.
The ratio I am talking about is the customer lifetime value to customer acquisition cost ratio.
What is customer lifetime value (CLV) and customer acquisition cost (CAC)?
The ratio is made up of two metrics that are already very powerful in themselves: Customer lifetime value and customer acquisition cost.
Customer lifetime value (CLV) shows you how much a customer spends with your company over their lifetime, plain and simple.
For example, if your product costs $10 per month and the average customer spends two months with you, your average customer lifetime value would be $20.
Customer acquisition cost (CAC) tells you how much it costs you to acquire a new customer. This includes all marketing and sales costs such as salaries, personnel costs, advertising costs, content creation costs, technical costs, etc. - All the things you need to get new customers.
Now, before we go any further, remember that your customer acquisition costs will vary depending on the marketing channel you choose. For example, if you have a sales team, your customer acquisition costs will automatically be higher because sales teams can be expensive. So keep that in mind.
So these are the two metrics you need to know anyway in your business: How much it costs you to get a new customer and how much a customer brings in.
Now we put them together in a ratio.
Resources to build a successful businessCustomer lifetime value (CLV) shows you how much a customer spends with your company over their lifetime, plain and simple.
For example, if your product costs $10 per month and the average customer spends two months with you, your average customer lifetime value would be $20.
Customer acquisition cost (CAC) tells you how much it costs you to acquire a new customer. This includes all marketing and sales costs such as salaries, personnel costs, advertising costs, content creation costs, technical costs, etc. - All the things you need to get new customers.
Now, before we go any further, remember that your customer acquisition costs will vary depending on the marketing channel you choose. For example, if you have a sales team, your customer acquisition costs will automatically be higher because sales teams can be expensive. So keep that in mind.
So these are the two metrics you need to know anyway in your business: How much it costs you to get a new customer and how much a customer brings in.
Now we put them together in a ratio.
Customer lifetime value to customer acquisition cost ratio
A good rule of thumb is to have a customer lifetime value to customer acquisition ratio of 3:1. This means that you make three times more money from customers than it costs to acquire them.
If we take our example from earlier and say a customer spends $20 with us and it costs us $6 to acquire a new customer, the CLV to CAC ratio would be around 3:1 - actually a little higher.
If the ratio is closer to 1:1, it means that you are not making any money from the customer. This would happen if you spend $20 to acquire a new customer and they only spend $20 with you. If the ratio is closer to 5:1, you can think of new ways to invest to get more customers and not miss out on new marketing opportunities. Basically, you could invest your money in some alternative marketing channels and test them to improve your ratio.
The reason I like this ratio so much is that it helps you quickly understand if your business is going in the right direction. I mean, if you see that it costs you more to acquire new customers than they bring in, your alarm bells should ring.
But I want you to know one thing:
Early-stage startups in particular barely break even when we look at this ratio. And the reason is clear - they often don't have a market fit, they still need to find the right marketing channels, and they may not have proven their value proposition to customers. Customers look at them quickly, but they don't invest money in them. So, these early-stage startups need to take that investment. But they should make it a high priority to fix it, otherwise they will go out of business very soon.
So, they should always try to improve that ratio. And so should you. Here are 3 pro tips you can use to either improve your customer lifetime value or reduce your customer acquisition costs.
If we take our example from earlier and say a customer spends $20 with us and it costs us $6 to acquire a new customer, the CLV to CAC ratio would be around 3:1 - actually a little higher.
If the ratio is closer to 1:1, it means that you are not making any money from the customer. This would happen if you spend $20 to acquire a new customer and they only spend $20 with you. If the ratio is closer to 5:1, you can think of new ways to invest to get more customers and not miss out on new marketing opportunities. Basically, you could invest your money in some alternative marketing channels and test them to improve your ratio.
The reason I like this ratio so much is that it helps you quickly understand if your business is going in the right direction. I mean, if you see that it costs you more to acquire new customers than they bring in, your alarm bells should ring.
But I want you to know one thing:
Early-stage startups in particular barely break even when we look at this ratio. And the reason is clear - they often don't have a market fit, they still need to find the right marketing channels, and they may not have proven their value proposition to customers. Customers look at them quickly, but they don't invest money in them. So, these early-stage startups need to take that investment. But they should make it a high priority to fix it, otherwise they will go out of business very soon.
So, they should always try to improve that ratio. And so should you. Here are 3 pro tips you can use to either improve your customer lifetime value or reduce your customer acquisition costs.
3 pro tips to improve your CLV to CAC ratio
Inbound marketing
The first tip I want to give you for reducing your customer acquisition costs is to experiment with your marketing channels. If you find that you are paying quite a lot for a new customer because you are relying solely on a sales team, for example, it might be time to look at alternatives. And one very powerful marketing channel is inbound marketing, or content marketing.
The goal here is to attract your audience to your business. In this case, you don't make direct sales. Instead, you focus on creating content and showing people the value you offer through videos, e-books, infographics, how-to guides, blog posts and so on.
Remember: Although content marketing takes time, everything you create is a long-term asset. For example, a blog post you create can be seen by potential leads years later. And if you have great content, they could become customers - and the best part is, you don't have to do anything - I mean, you only have to create that content once.
So the assets you create are a powerful tool to help you increase visibility, organic traffic and your overall Google rankings. In addition, they will also help you position yourself as an expert and a thought leader. So content marketing is a powerful marketing channel and I would always recommend using it.
The goal here is to attract your audience to your business. In this case, you don't make direct sales. Instead, you focus on creating content and showing people the value you offer through videos, e-books, infographics, how-to guides, blog posts and so on.
Remember: Although content marketing takes time, everything you create is a long-term asset. For example, a blog post you create can be seen by potential leads years later. And if you have great content, they could become customers - and the best part is, you don't have to do anything - I mean, you only have to create that content once.
So the assets you create are a powerful tool to help you increase visibility, organic traffic and your overall Google rankings. In addition, they will also help you position yourself as an expert and a thought leader. So content marketing is a powerful marketing channel and I would always recommend using it.
Resources to build a successful businessReferral programs / Word-of-mouth
The next pro tip I want to give you is to use referral programs - or more specifically, a viral loop. Viral loops work very simply - they have three steps:
1. A customer discovers and uses your service.
2. The customer tells a friend about the service.
3. The friend becomes a customer.
Pretty straightforward.
Viral loops work particularly well for services that become more valuable the more people use them. For example, social media platforms like Facebook, Instagram or communication platforms like Skype already have viral loops built in. After all, there is little point if you are the only one using them. So of course you invite your friends.
A great way to get referrals going is to reach out to your top customers - the ones who are super loyal - and then reward them for inviting more people.
The important thing is that you don't give them stupid rewards that nobody wants, like meaningless badges or anything like that. You need to make the rewards really valuable.
For example, give them early access to new features, a discount on your other plans, or some free trial time on upgraded plans. Whatever it is, make it valuable. The benefit to you is this: As they are already your most loyal customers, they are likely to help you by inviting more people, and secondly, they will stay with you longer because they have just received a nice addition to their current plan.
In the end, it's a win-win situation.
Getting referrals for your business is a powerful growth driver. Again, once you have this system up and running, all you really need to do is reach out to your best customers and your investment is done.
1. A customer discovers and uses your service.
2. The customer tells a friend about the service.
3. The friend becomes a customer.
Pretty straightforward.
Viral loops work particularly well for services that become more valuable the more people use them. For example, social media platforms like Facebook, Instagram or communication platforms like Skype already have viral loops built in. After all, there is little point if you are the only one using them. So of course you invite your friends.
A great way to get referrals going is to reach out to your top customers - the ones who are super loyal - and then reward them for inviting more people.
The important thing is that you don't give them stupid rewards that nobody wants, like meaningless badges or anything like that. You need to make the rewards really valuable.
For example, give them early access to new features, a discount on your other plans, or some free trial time on upgraded plans. Whatever it is, make it valuable. The benefit to you is this: As they are already your most loyal customers, they are likely to help you by inviting more people, and secondly, they will stay with you longer because they have just received a nice addition to their current plan.
In the end, it's a win-win situation.
Getting referrals for your business is a powerful growth driver. Again, once you have this system up and running, all you really need to do is reach out to your best customers and your investment is done.
Upsells and cross-sells
The third tip I want to give you to improve your customer lifetime value is to use upselling and cross-selling.
Upselling means encouraging existing customers to upgrade their subscription plans, for example by offering them additional features, advanced functionality or higher level plans that meet their needs.
For a simple example, let's say Netflix offers you a plan that allows you to watch 10 movies a month for $1 and another plan that allows you to watch 50 movies a month for $3. If they encourage you to upgrade to the higher plan - that would be upselling.
The main objective is not only to increase revenue, but also to maximize customer satisfaction by providing a tailored solution. In the long term, this will help you build stronger customer relationships and improve the user experience, which will help you keep those customers longer.
The terms upselling and cross-selling are often used interchangeably, but they are different concepts. Cross-selling means recommending additional products or services to existing customers, while upselling encourages customers to upgrade their current subscription. When you use cross-selling, you are showing your customers complementary solutions that should improve the overall user experience. An example of cross-selling is Amazon's 'people also buy' box.
So, to increase revenue, you should always - I repeat, you should always - show customers additional relevant offers. Successful cross-selling not only increases revenue, but also builds customer loyalty by positioning you as a total partner.
However, and this is important, never sell something that is of no value to the customer just to increase revenue. If you do, you will damage your customer relationship. So always make sure what you offer is valuable.
Upselling means encouraging existing customers to upgrade their subscription plans, for example by offering them additional features, advanced functionality or higher level plans that meet their needs.
For a simple example, let's say Netflix offers you a plan that allows you to watch 10 movies a month for $1 and another plan that allows you to watch 50 movies a month for $3. If they encourage you to upgrade to the higher plan - that would be upselling.
The main objective is not only to increase revenue, but also to maximize customer satisfaction by providing a tailored solution. In the long term, this will help you build stronger customer relationships and improve the user experience, which will help you keep those customers longer.
The terms upselling and cross-selling are often used interchangeably, but they are different concepts. Cross-selling means recommending additional products or services to existing customers, while upselling encourages customers to upgrade their current subscription. When you use cross-selling, you are showing your customers complementary solutions that should improve the overall user experience. An example of cross-selling is Amazon's 'people also buy' box.
So, to increase revenue, you should always - I repeat, you should always - show customers additional relevant offers. Successful cross-selling not only increases revenue, but also builds customer loyalty by positioning you as a total partner.
However, and this is important, never sell something that is of no value to the customer just to increase revenue. If you do, you will damage your customer relationship. So always make sure what you offer is valuable.
What's next
And there you have it - these are the top 3 tips for reducing your customer acquisition cost or improving your customer lifetime value.
There are many more, of course, but starting with these will give you a solid foundation. Remember that there are two sides to making this ratio effective. If you feel you don't know how to increase your CLV at the moment, you can always try to reduce your CAC using the strategies I've shown you. Just bear this in mind if you feel you are stuck.
But wait, I got something for you. Whether you're taking your first steps into the entrepreneurial world, or you're a seasoned SaaS professional looking to improve what you do, my Startup Success Bundle is tailored to your needs. The bundle will teach you everything you need to build a successful SaaS business or startup - from validating your idea to getting your first customers and making revenue.
Check it out for yourself!
There are many more, of course, but starting with these will give you a solid foundation. Remember that there are two sides to making this ratio effective. If you feel you don't know how to increase your CLV at the moment, you can always try to reduce your CAC using the strategies I've shown you. Just bear this in mind if you feel you are stuck.
But wait, I got something for you. Whether you're taking your first steps into the entrepreneurial world, or you're a seasoned SaaS professional looking to improve what you do, my Startup Success Bundle is tailored to your needs. The bundle will teach you everything you need to build a successful SaaS business or startup - from validating your idea to getting your first customers and making revenue.
Check it out for yourself!
