THE STARTUP CHAT

Steli Efti:

Hey everybody, this is Steli Efti.

Hiten Shah:

And this is Hiten Shah.

Steli Efti:

And in today’s episode of The Startup Chat we’re going to talk about different ways  for you to increase you’re customer lifetime value. So the idea here is, you have  a business, you have a startup, you have customers. Congratulations, right? But a lot of  people out there, well a lot of businesses out there, they way you start is  that you’re trying to build something people care about, you get some early customers then  eventually you start asking more questions about how healthy is my business model, how much  revenue are we really making per customer, and then also, how are we going to  grow this business? The answer to how you grow it, what kind of challenge you  gonna have to acquire more customers, is strongly influenced and dictated by how much money you’re making per customer because the more money you make, the more options you have  in how much money you can spent to acquire customers. I wanted to just chat  with you, you have so much experience. We both have advised, helped, and built so  many different businesses and experimented with this a lot, so for people that are out  there and like, “You know, I’m making money but I’m not making that much money  per customer. How can I make more money? What are my ways to increase my  customer lifetime value?” Let’s just bang a few of these out there and give people  a framework that they can go through if they are in that spot and they’re looking to increase the revenue and profits they make per customer.

Hiten Shah:

Yeah. The truth is, there’s not that many ways to increase customer lifetime value. It’s  really just about breaking down, what are the different opportunities that you have in your  business? We could get into really complex things like, change your customer. Right?

Steli Efti:

Yep.

Hiten Shah:

So, what I’m curious about, Steli, is what guardrails would you like to put on  the discussion? On this one.

Steli Efti:

Let’s do this. Let’s actually focus on the few basic, simple ways that you can  do with your installed customer base and then once we bank through those, we could  say, “Hey, if you think through these or you’ve tried all these and you’re still  not making enough money, then the only alternatives are A B and C.” Without going  into too much detail on how to execute on these things.

Hiten Shah:

Cool. So, one way is you get more money from existing customers by selling them  something more. Right?

Steli Efti:

Yeah.

Hiten Shah:

Another way is you just raise your prices.

Steli Efti:

Yeah.

Hiten Shah:

Which is a very common piece of advise that almost everybody gives to everybody else  in SaaS, especially. And probably in almost any category, ’cause whatever you’re charging, you’re probably  not charging enough is kind of the thesis. I could argue that point but that  is the second way.

Steli Efti:

Let me stop you right there real quick and let me ask you this question.  I think I know the answer but I still want to ask the question, which  is, have you, out of the hundreds or even the thousands of follows that you’ve  ever met, have you ever met a startup where your first piece of advise after  talking to them was “Whoa, your price is way too high”?

Hiten Shah:

It’s rare, but it happens.

Steli Efti:

It happens, huh? I’ve never had this case before.

Hiten Shah:

Yeah, yeah. Maybe I’ve had it once or twice, someone’s just being ridiculous. Right? They’re  like, “Oh, I think small medium businesses are gonna pay me $2,000 a month.” Actually,  hold on. What do they pay for everyday? And every month? And can they even  afford that? And how important is what you’re doing? So I literally … That was  the exact discussion. That was probably only once. But, yes, you are correct. I think  most people do not charge enough. So one of the easiest ways is just think  through what you’re charging and see if there are any experiments, any test, you can  run to increase the price and see what happens. This is actually one of the reasons I love sales, especially early days of sales when you’re actually doing inside sales  or even outbound or whatever process you have, because you can, and correct me if  I’m wrong ’cause you are the expert here, but you can easily just talk to  somebody and charge every person you talk to more and more money, or say you were gonna charge them more and more money, right?

Steli Efti:

Absolutely, yeah.

Hiten Shah:

Yeah, and that’s one of the easiest ways to figure out a price point, which  is, you want some people to say no but you want most people to say  yes. If nobody is saying no to your price, you’re probably charging too little. And there’s probably some signals that you can get easily. You know the most common conversation  I’ve actually had around pricing, in person especially, is “Oh, I told them that price  and I wish I would’ve charged more. Because they told me that’s cheap.” I wanna  give you one quick tip on this before we continue. Which is, it is your  fault if you’re charging them too little and you could’ve known that you could’ve charged  them more. It mean you didn’t do your homework to figure out what they were  willing to pay based on what they’re already paying for. So a better way to  approach it would be, if you’re replacing something they’re using, ask them how much they  pay for it. If you’re replacing something they’re using and you know what it is,  go get on a sales call, get on a demo, go do that thing with  that company that you are replacing and go understand what their pricing model looks like,  if it is not on a website. You should do that anyways for a whole  bunch of reasons, but that’s key because you should know your customer’s paying for before  you even talk to them and how much they’re paying, ideally. If you don’t know  then that can be one of the first things you go after in your conversation  with them, and you should. I have never seen a place where the customer will  not tell you what else they are paying for. I don’t know if you have.

Steli Efti:

No. A lot of times, people never ask the question because they assume the customer  would never tell them. You’d be surprised what people will tell you just if you  ask them, right?

Hiten Shah:

Everyone will tell you.

Steli Efti:

Everybody, yeah.

Hiten Shah:

I’ve never had an instance where they won’t tell you what they’re paying for and  how much, because, what’s it to them? It’s another software they use, right?

Steli Efti:

Yeah.

Hiten Shah:

It’s nothing to them. And you could find out yourself, but it’s nice to know  what that specific company is paying, why they love it, and what they’re paying for.  A lot of times, founders are just scared of competition, right?

Steli Efti:

Yeah.

Hiten Shah:

Embracing it is important. That is your, probably, biggest way to increase your lifetime value  and in how much you charge just by understanding what they’re paying for and where  you should set your pricing based on that.

Steli Efti:

I love that. We talked about this in a prior episode, how the . It’s  funny, I had a conversation just recently with a founder, where they told me they  had doubled their price monthly and it made no difference in their conversion rate. They  had, basically a SaaS prog that got good amount of traffic and people who just  operate themselves. They were like, “Well, we were debating this for six months and we  doubled the price recently and wow, we will be so surprised that the … It  mad no difference to our conversion rate so we think that that was a really  good step.” Then I asked them, because the price still seemed very cheap to me,  I went, “How did you decide for this price?” And they’re like, “I don’t know,  it just seemed like doubling would be the most aggressive thing we can do.” I’m  like, “Okay.”

Hiten Shah:

Oh, aggressive, I like it.

Steli Efti:

Right.

Hiten Shah:

That’s a good word in pricing.

Steli Efti:

Yeah. So I asked them, “okay, so you doubled and it made no difference. When  are you gonna double again? When are you gonna … Like you need to push  to see where’s the ceiling here.” Right?

Hiten Shah:

Yeah, totally.

Steli Efti:

They looked at me and they were like, “Oh, shit. Huh.”

Hiten Shah:

Missed opportunity.

Steli Efti:

And I’m like, “Are you guys nuts? Like you doubled and it made no difference  and you’re just like …”

Hiten Shah:

Double again!

Steli Efti:

They were just totally content and happy that happened. They’re like, “Oh my God, it  didn’t change anything.” Well then we need to doub … I’m like, “The goal is  to get to a point where it starts making a negative impact then you know  that’s our ceiling and you can go down from there. But until you get there,  why are you stopping?” And they’re like, “Oh yeah, okay. Yeah, we should do this.  We should probably do this in like a few months.” I’m like, “What, a few  months. Today. Can we just change the pricing right now? Like what’s stopping you from  doing this?” And they could not come up with a single thing that would stop  them from hanging the price again other than their own psychological barriers. Increasing … It’s  funny to see founders that increase the price and are surprised that it didn’t really  affect their conversion rates but then it’s baffling, heartbreaking to a certain degree, that that  didn’t prompt them to think, “We need to do this more until we’re really know  what the ideal pricing is here.”

Hiten Shah:

I love it. Love it.

Steli Efti:

So, we talked about upselling, selling the existing customers more stuff. We talked about increasing  pricing for the stuff you’re already selling them, right? Whatever the plans are, the features,  the products, whatever it is just charge more. Then the third thing I think is,  at least if it’s a subscription product, is keeping your customers longer around or making  them use your product more so that …

Hiten Shah:

Oh yeah.

Steli Efti:

So having …

Hiten Shah:

Lower your turn.

Steli Efti:

Lower your turn, improve your retention, and improve … Whatever you want to call it  … The usage within the organization, if your number is based on some kind of  seats or numbers of people that access the system. So those are really the three,  if you want to increase your customer lifetime value, those are the three things you can do, if you don’t change who your customers or what you do fundamentally as  a business

Hiten Shah:

I don’t think we’ve don’t a episode on reducing turn or increasing retention and all  that so, I so badly want to dig into that right now. But let’s save  it ’cause I think that’s a topic in itself. Right?

Steli Efti:

Let’s definitely talk about that, that’s more for sure. So … It seems like you  already hinted at this but I want highlight it so it’s beyond any interpretation. If  I’m a founder, I have a product, and I’m asking myself or I’m thinking, “I  need to make more money per customer, I need to increase my sale CLTV, my  customer lifetime value.” We gave people three options, upsell them more stuff, increase your current  pricing, keep people around for longer, get better retention, lower turn rates. If I look  at these three things, there is a priority, usually right? How do I prioritize what  I do first or what I try and test first?

Hiten Shah:

Yeah in most businesses, and again this is probably why I said this about the  third one, in most business, at least my experience, they probably have too much turn.  Turn is the hardest thing to resolve ’cause it’s something that naturally happens with your  product, it’s not like you’re in too much control of it most of the time,  at least initially. Most companies have more turn than they know what to do with.  The reason I say that is, it’s also where there’s the worst experience when it  comes to lifetime value. It’s basically, you put all this effort into acquiring them and  eventually they stop using you and they stop paying you more importantly. So to me,  that’s usually the first place I would dig in because it’s the most challenging. That’s  just a generic statement but usually, most companies I see that are in SaaS have  a turn problem. Especially in the earlier stages, pre series A, sometimes post series A  unfortunately. Companies have gotten really good at acquiring customers, they aren’t necessarily the best at  keeping them around. One of the reasons is, these days it’s not just a sales  problem, it’s not just an account management problem, it’s also an onboarding and product problem.  Onboarding meaning customer success. Onboarding from a product standpoint as well as onboarding in terms  of, do you know the things that ill make a customer successful for the long  haul during the first 90 days of them using you? And that question is not very easy for most people to answer. So, before you go start digging into, “Oh,  can I charge people more money?” Or even, “Can I sell them more stuff and  charge them more for that? Or can I get more users?”, really dig into your  turn and make sure that the turn isn’t killing you. And what I mean by  that is, some companies have 1-2% turn, that’s very rare, most companies, and I mean  on a monthly basis, most companies have a usually like 5-7% turn rate month over  month, especially initially before they started working on that. Getting that down to 2-3%, getting  it down to, what a lot of people call, a negative turn, is really important.  And just to give a quick primer o negative turn, just ’cause I said it  I guess, negative turn means that you are getting more of your existing customers to  pay you more money than the people who are leaving you and what that costs  you. So, if the people that are still with you pay you more money every  month, like if you have people paying … Let’s say you’re making 1,000 bucks a  month, just a very simplified across your customer base, and you’re losing 100, that turns into 900, that’ll be $100 of turn, which is like 10% turn. But if you  were making another 100 on that or more, that would put you into the negative  turn territory. Which means that you are making more money than you are losing every  month from your turn by the existing people who are willing to pay you more  money. That kind of goes back into area 1 and 2, right? Honestly, these three  things are related because of the way you can calculate them. I honestly have to  be straight up about this, I used to hate people talking about negative turn ’cause  it was a made up metric initially, just to help people feel better about their  turn, in my opinion. Lately, I’ve been coming around to it simply because you don’t  really have a healthy business unless everyone who pays you has some opportunities to pay  you more money over time. So that goes to my second one. So to me,  the prioritization is, really look at your turn, make sure there’s no issues there are  low hanging or that you’re not digging into. Then, look at how you can get  existing customers to pay you more money and then sort of focus on increasing your prices. The reason I say that, is because early on, increasing your prices is the  easy thing and many people would’ve done that and so that probably is the first  thing you already can think of and you get advice on, but it’s really quickly  that becomes the last thing you should focus on and turn becomes a more important  … And then getting upsells over time become important. ‘Cause as you dig in to  turn you realize how the upsells can help you. So, that’s my sort of long  winded way to think about it, I guess.

Steli Efti:

I love it. Especially because it’s the counterintuitive way, as you said, that most people  would go about this. But the problem is, if you have a turn issue and  the first thing you do is increase prices to make more money, it’s gonna just  accelerate your turn issue.

Hiten Shah:

You still have a turn issue, yeah.

Steli Efti:

No, it’s probably gonna get worse even. Because now people were telling they’re not getting  enough value out of your product that’s why they’re leaving, now you’re charging them more  money, so they’re gonna be leaving at faster rates, right?

Hiten Shah:

Correct.

Steli Efti:

So now you’re making this … Short-term it might look like you’ve improved something but  long-term you’re gonna make it much more difficult for you to figure things out. So  I love the direction of this. All right, so very quickly before we wrap this  episode up, let’s say you do all the right things, you go through all the  right steps and it’s still not getting you to the numbers you want, or let’s  say you just look at your customer base and you do a bunch of math  and you think, you’re convinced, “You know what, no matter what the fuck I do,  these people just don’t have that much money, so I’m not gonna be able to  make enough money on them to be able to grow the business as much as  I want or to be able to use the channels that I want …” the  only two big ways, if you’re at that point, is to, I mean the one  thing is to change your customer base, but changing your customer base can be such  a fundamental thing that it also means that you might have to change, significantly, what  your product looks like or even just completely build something new to serve that totally  new customer base, right?

Hiten Shah:

Yeah, totally.

Steli Efti:

But, we’ll leave that all for another episode. So, if you guys out there are  in that spot and you’re like, “No, tell me more, that is my problem. Please.”

Hiten Shah:

We will talk about this.

Steli Efti:

“Chat about that.” We will. And you can always Tweet us @Steli on Twitter or  @hnshah for Hiten on Twitter and let us know, “Please talk about this.” The more  we hear that, the more it’s gonna prompt this episode up in the latter. For  today I think that that’s it from us … The three straightforward ways for people  to increase their customer lifetime value.

Hiten Shah:

See ya’.

Steli Efti:

See ya’.