INDEED, WHY YOU ARE UNDERESTIMATING CUSTOMER LIFETIME VALUE
If you want to build predictable revenue, you need to keep your customers happy and keep them returning. FaceValue Application, the Purchase Generator, helps you to load the customer details into CRM, automates the messages, and keeps a constant watch on the customer responses.
Everyone in tech talks about Consumer Lifetime Value, also known as CLTV OR LTV. So, they run a magic metric to calculate that their average consumer is worth $10,000, and then say you are supposed to spend a certain amount on Trades and Marketing to grow- usually some fraction of your LTV, or about the first year's worth of revenue from a customer.
Standard LTV calculations do not account for the "second-order" viral and word-of-mouth customers who come in later, from the first customer to their friends.
Your average LTV should be higher because the first consumer should get extra credit for helping their friends to your company. By underestimating the value of a customer, you may under invest overall in acquiring them. More commonly, you invest too much in Trades and Marketing and not enough in Customer Success.
Total lifetime revenue from a single average SaaS customer
Let's imagine that trades close its average enterprise customer for $10,000 a year. Then, in year 2, the average enterprise customer A adds $2,500 in additional licenses for $12,500 in total. In year 3, they add another 25%, so direct revenue over the first three years is $ 38,125 from that early trade.
Second-order effects
At the end of year 1, your champion quits Enterprise Customer A, but goes to Enterprise Customer B to do the same job, and repurchases your product. The first trade is $42,000, and in year 2 its really $46,000. At the end of the year, your champion tells three of their friends about your company, and one of them purchases. So, now the first trade is $60,000 with the second-order revenue, as long as you are making your consumers’ super-duper happy.
Your all-in customer Lifetime Value, including second-order revenues, could be double your current estimate.
Looking for an easy way to understand your customers?
Use the Customer Survey feature in the FaceValue Application to send out relevant survey questions. You can easily use the survey answers to analyze the response, cross-verify with the customer information and gain vital information about your customers. You can do all of it and much more from FaceValue. Want to know more about what you can do? Try FaceValue now.
This blog is excerpted from: ‘From Impossible to Inevitable: how hyper-growth companies create predictable revenue’ co-authored by Aaron Ross and Jason Lemkin.
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