Scenario: Emily is the owner of a SaaS (Software as a Service) company offering project management tools for small businesses. When Emily first launched, she focused primarily on acquiring new customers and measuring success based on the value of the first contract. For example, her pricing structure meant a typical customer signed a 1-year contract for $1,000. To Emily, the $1,000 was the main indicator of success, and she didn’t look beyond the first contract.
What’s Missing:
Emily is missing out on the concept of Customer Lifetime Value (CLTV). CLTV is the projected revenue a customer will generate over their entire relationship with a company. Focusing solely on the initial sale or contract is a short-term view that fails to capture the full value of customer relationships. In the long run, a customer could be worth much more than that first $1,000 contract.
Here’s why Emily’s business is actually far more valuable than she thinks:
Renewals and Upsells: Many of Emily's customers are likely to renew their contracts. On average, small businesses stay with her for 3 years, and she offers additional services such as premium support and advanced features, which many customers upgrade to after their first year. If her average customer upgrades to a higher-tier plan worth $1,500 per year in year two and three, the total value of that customer over 3 years is $4,000, not $1,000.
Churn Rate Impacts CLTV: Emily’s team currently has a 20% churn rate (customers who do not renew after their first year). Reducing this churn rate by improving customer service, enhancing onboarding processes, or offering more attractive renewal packages could keep more customers in the pipeline longer, boosting their CLTV.
Referrals and Word-of-Mouth Growth: Satisfied customers can be powerful advocates for Emily's SaaS business. Emily is currently not incentivizing referrals or tracking how many customers come from word-of-mouth. By implementing a referral program where existing customers receive discounts for bringing in new customers, Emily can unlock even more value. For example, if 10% of her customers each refer one new customer annually, the value of her customer base multiplies.
Understanding the Full Value of CLTV:
Emily has 100 customers, each paying $1,000 in the first year. At first glance, she believes her revenue is capped at $100,000. But when applying a CLTV framework, the situation looks like this:
Year 1 Revenue: 100 customers x $1,000 = $100,000
Year 2 Revenue (80% renewal rate + 10% upgrades to $1,500 plan): 80 customers x $1,000 + 10 upgraded customers x $1,500 = $97,500
Year 3 Revenue (80% of remaining renewals + 10% upgrades): 64 customers x $1,000 + 8 upgraded customers x $1,500 = $79,200
Total revenue from just these 100 customers over 3 years = $276,700.
But that’s not all. If 10% of her original 100 customers refer one new customer each
year:
Referrals (Year 1): 10 new customers = $10,000
Referrals (Year 2): 8 new customers = $8,000
Referrals (Year 3): 6 new customers = $6,000
Total additional referral revenue over 3 years = $24,000.
Total Value from 100 Customers Over 3 Years = $300,700.
Emily’s real CLTV strategy demonstrates that each customer is worth far more than just the first contract. By focusing on renewals, upsells, and referrals, she can transform her business from focusing on short-term gains to long-term, sustainable growth.
How to Maximize Customer Value Through Referrals:
Referral Incentive Programs: Emily can offer discounts, free months of service, or exclusive features for customers who bring in new clients. This encourages customer advocacy and boosts CLTV by turning loyal customers into ambassadors.
Customer Feedback Loops: Listening to current customers and refining the product ensures satisfaction, which leads to organic referrals and long-term relationships.
Conclusion:
Many business owners, like Emily, make the mistake of only valuing the first contract or sale. CLTV helps paint a fuller picture, showing that the customer relationship spans across multiple purchases, renewals, and referrals. By focusing on maximizing value through retention, upselling, and incentivizing referrals, a customer can become even more valuable than originally expected.
This approach helps business owners unlock the hidden potential of every customer, fostering deeper relationships and long-term success.
Comments