From custom meals to makeup samples, subscription business models are trending with consumers and rapidly attracting business leaders and entrepreneurs. The distinction between subscription services and other various tech fads? The subscription economy is here to stay.
The success of software companies like Salesforce has popularized the SaaS, or "Software as a Service" subscription model, in which software is delivered via the web and licensed on a subscription basis. There's nothing complicated about the model's appeal; sellers like recurring revenues and buyers appreciate the cost savings and convenience that a recurring model provides.
If you're at the helm of a SaaS company, the recurring revenue model is undoubtedly on your radar for 2016. In seeking marketing success, be aware that there are two key marketing metrics to train your sights on - the cost to acquire a customer (CAC), and the customer lifetime value (LTV).
Feeding the Subscription Model: CAC and LTV
In the world of marketing, Customer Acquisition Cost (CAC) is the cost associated with convincing a customer to buy a product or service, while the Customer Lifetime Value (LTV) is a prediction of the net profit attributed to the entire relationship with that customer.
The SaaS subscription model is fed by reducing CAC and increasing the LTV. Keep in mind that CAC is highly dependent on your sales process; the more complex your sales process, the higher your CAC.
Reduced CAC + Increased LTV = Succe$$
These two metrics drive the essence of your SaaS subscription business and enable you to maintain your competitive edge.
Success Step 1: Reduce CAC
- Consider simplifying your product to reduce human sales touch and any other wasteful costs associated with closing the deal. For example, low-complexity product information can be communicated on your website to increase buyer comfort level, thus making the transaction quick, touchless, and 100 percent self-service.
- Work to lower the cost to generate leads. Today's SaaS buyers conduct the majority of their research online, so a solid inbound marketing strategy is critical to producing useful content, promoting it through multiple channels, and facilitating conversion.
- Depending on the price points and complexity of the SaaS products, a free trial offer can be an effective strategy to convert prospects.
- Nurture prospects based on target personas, to ensure that each unique buyer is presented with content that will support an educated decision. At a previous company which provided SaaS solutions for real estate portfolio management, we were able to do this nurturing quite successfully with the marketing automation system Eloqua, which contributed several million dollars in sales.
Success Step 2: Increase the LTV
- The lifetime value metric should be at least 36 months for B2B companies, so your job is to acquire "good-fit" customers. It is important to have a clear profile of your customer up front in order to achieve this.
- Reduce churn and retain customers. Most of a SaaS company's revenue comes from existing customers--according to Gartner, a full 80 percent of all future revenue will come from just a fraction (20 percent) of current customers. If you increase your customer retention by only 5 percent, you can increase your business's profitability by 75 percent, say researchers at Bain & Co.
- Create delightful customer experiences for onboarding and customer success. For SaaS, it's critical to give your users superb UI and UX design. Besides customer retention and LTV, it also helps with word of mouth referrals for customer acquisition. Trello has deployed this strategy very successfully.
The acquisition of "good-fit" customers, easy onboarding, active user community and sharing of customer successes along with potential loss of data on switching contributed to our having a retention rate of greater than 98 percent!
How are you marketing your SaaS products in 2016?
Ameeta Soni is an innovative marketing executive with a proven ability to drive revenues and profits. Ameeta's background includes marketing, consulting, and board experience for several SaaS companies. Her expertise includes strategy, new product introduction, strategic partnerships, building the sales pipeline and growing market share. She is an advisor to sport-tech company FitTrace and a mentor at TechStars. Ameeta is a Springboard alum and past chair of the MIT Enterprise Forum of Cambridge.