How SaaS Companies Grow Customer Share, Lifetime Value, MRR and ARR
- Software-as-a-Service industry research shows that the majority of the Best-in-Class publishers applied three best practices to grow MRR, ARR, customer share and customer lifetime value.
- Customer affinity is a best practice that turns first time buyers into repeat customers and repeat customers into customer advocates. That makes customer affinity a publishers most valuable and durable asset and a proven program to increase customer share.
- Strategic Account Management is a best practice that shifts selling to existing customers from reactive to proactive, and from random purchases initiated by customers to intentional sales pursuits led by salespeople.
- Customer Lifetime Value is a best practice and leading indicator of revenue growth. It's an efficient and highly effective measure of a SaaS publisher's relationship with its customers and indicative of future revenues and profits. Customer lifetime value is influential because even small increases multiplied by the number of customers creates a large revenue expansion.
Too many times, customer growth programs are born from interesting ideas or ambitious explorations. Unfortunately, unsupported methods most often lead to trial-and-error pursuits that squander investments and delay results.
A better approach is to replicate the customer growth programs that have been proven most effective by the top Software-as-a-Service companies. This can done with evidence-based best practices that are born from research findings that show what the Best-in-Class leaders (i.e., the top 15%) did to outperform all others.
They are prescriptive recommendations that increase focus, save time, lower risk and show the most direct route to increasing customer share and lifetime value.
Best Practices to Grow MRR, ARR, Customer Share and Lifetime Value
There is no one-size-fits-all method to grow MRR, ARR, customer share, customer lifetime value and customer revenues. But there are customer growth best practices that share valuable lessons of what works, what doesn't and how to prioritize time and investments for the biggest revenue impact.
Here are three of those lessons.
Begin with Customer Affinity
Customer relationships are extremely influential in growing customer share. However, when the goal of growing customer relationships is left to informal methods, the results are inconsistent. To grow customer relationships systemically and at scale requires a customer strategy.
The overarching goal of a customer strategy is to create customer affinity. Customer affinity can be measured and improved. That's helpful because it is a leading indicator of increased purchases, referrals, customer share and retention; all factors that deliver significant and sustained revenue growth.
Customer affinity also delivers lower cost of sales, word of mouth referrals and online advocacy. Even better, it creates a protective barrier against competitors offering similar solutions and benefits.
But achieving customer affinity generally does not occur naturally. It's created and scaled with a well-executed plan. The below illustration shows the six components to achieve customer affinity and the downstream revenue and profit objectives.
Customer affinity benefits are obvious. But that doesn't make this easy to achieve. Fortunately, there are methodologies that bring structure to the goal and work well for software-as-a-service companies.
The four most common methodologies are Customer Relationship Management (CRM), Customer Experience Management (CXM), customer engagement and customer loyalty programs. Each of these methods has overlap with the others but is unique and delivers unique benefits.
Customer affinity is one of only four sustainable competitive advantages and a differentiator that is not easily duplicated by competitors or displaced by new technologies. In fact, achieving customer affinity creates a customer connection that can withstand disruptive technologies, competitor encroachment and the erosion of other competitive advantages.
Apply Strategic Account Management
The best way to keep a customer is to continuously expand your product footprint in their business.
Selling to existing customers also achieves a much lower cost of sale and higher margin revenue growth.
Research shows that the highest growth software companies apply Strategic Account Management programs to continuously grow customer share. In fact, the Sales Excellence Report found that SaaS companies with active Strategic Account Management programs achieved 23% higher existing customer sales than those without.
Think about that. A single sales program that grows existing customer revenues by 23%. That should cause any software company sales leader seeking high margin revenue growth to take note.
But the research also found account management programs are easier said than done.
Strategic Account Management (SAM) was most often informal and inconsistent because of a lack of process and supporting technology.
That's why SAM processes must be supported in strategic account plans. These plans are long-term sale opportunity roadmaps that plan the future actions to align company solutions with customer growth aspirations over an extended horizon. This brings execution and measurability to land and expand customer growth strategies.
Technology automation is needed but can be a challenge as few CRM systems support SAM and account plans. Fortunately, some CRM platform systems offer ecosystems of third-party products for this purpose. Or as another option, something we do frequently with software clients is create a SAM page in their CRM system. We create a new CRM object with a subset of the opportunity object fields. Whether a packaged or custom solution, the CRM app manages the data to feed the strategic account plan and makes highly relevant product recommendations for up-sell and cross-sale.
The highest growth software companies do one more thing.
They use intent signals, digital footprints, telemetry and AI to monitor their customers so they can predict and prevent SaaS customer churn.
Customer churn prediction and prevention is a game changer for SaaS companies that struggle with customer retention. B2B SaaS customer retention strategies deliver significant and sustained revenue growth. So, to aid that goal you can leverage CRM software to calculate customer health scores and use AI to identify customers at risk.
Even better, knowing why customers leave permits software publishers to fix causes of churn and prevent it before it happens.
Measure Customer Lifetime Value
There is no single metric that defines a customer's value, but customer lifetime value comes close.
Most software publishers measure MRR, ARR and customer profit, but those are historical metrics. Customer Lifetime Value (CLV) is a predictive analytic that forecasts future value.
CLV is the present value of the future cash flows earned over the course of the customer relationship. Some software companies present CLV as a revenue figure. Others deduct customer related expenses, such as customer acquisition costs and costs to serve, and present CLV as a profit figure. We typically recommend the later. But either way, CLV is a projection showing the financial value of each customer to the company.
Unfortunately, most software companies don't act on CLV because their CRM system doesn't calculate this figure in the aggregate, by customer segment or for each customer. They are simply without this key performance indicator.
Fortunately, adding this measure to the customer record is not a difficult task. However, it should be done pursuant to a customer growth strategy that defines the actions to take based on the value. Here are some guidelines to get the most action from a CLV value.
- Before you can improve CLV, you need calculate it by customer segment and for each customer. You then need to insert this measure to the customer record so it can be acted upon. Display this value in the CRM system, at the account record.
- Advancing from static to dynamic customer segments will calculate more accurate CLV calculations. This will also permit more relevant and contextual communications, selling recommendations, support services, and customer experiences.
- CLV scores will prescribe actions to grow customer value. But those actions require time and investment. Before you invest to grow customer value, apply industry benchmarks to objectively forecast the financial impact. This will prioritize investments by revenue uplift or ROI. For example, the example below shows how changes in Customer Satisfaction impact CLV and earned revenue.
- To increase customer value, you need to know what customers want and are willing to pay for. Customer intelligence provides the insights to measure customer behaviors, purchase priorities, decision criteria and what it takes to increase MRR, ARR and customer share. The below diagram shows how customer intelligence can be componentized so it can be easily applied to different use cases. It also feeds the Account Plan for Strategic Account Management.
Customer intelligence can be acquired by capturing digital footprints, online behaviors and customer-related transactions. The data can be used to create customer segments, personas and a 360-degree customer view at the CRM account record.
It can also be acquired with a voice of the customer program which uses mostly digital tools such as surveys to ask customers what they want. Their input is also recorded in the customer record.
- Growing customer share and lifetime value at scale is aided with leading performance metrics. That is those metrics that precede shifts in customer share. Most customer metrics are stagnant, historical and do not provide the insights to increase customer share and lifetime value. However, there is a short list of KPIs that do.
These leading indicators vary somewhat but generally include software utilization, Account Engagement Score (AES), Net Promoter Score (NPS), Customer Satisfaction (CSAT) score, customer health score, purchase history (RFM), and online advocacy.
We have found a few metrics, such as increasing trends in credit memos, A/R aging and Days Sales Outstanding, that are indicative of future declining customer share. Recognizing these KPIs early enables swift remediation measures.
The bottom line is that Customer Lifetime Value can be used to systemically grow MRR, ARR and customer share. It is also helpful in recognizing customer relationships as assets, shifting customer focus from short-term profits to long-term lifetime relationship value and complimenting other customer-centric measures such as CSAT or NPS.