How to Maximize Customer Retention and Secure Growth Capital

A lot of growing, early-stage technology companies might end up investing in their marketing efforts to acquire customers to their platforms to sell services whose consumption might require a customer to pay a monthly fee. In fact, this model is used by lots of growing technology companies that provide software as a service, which can be abbreviated as “SaaS.”

However, it is difficult to make sure that a customer stays with you after paying for the first month. Even if you spend additional money to retain your existing customers, there is always the possibility that someone can drop in the next month. Your business might have spent significant resources to acquire a customer without even being able to see the entire lifetime value being realized.

Of course, if there were a way to differentiate at first sight the loyal customer from the type that’s just trying you out, it would certainly have been helpful for you to know it. Otherwise you could have invested the same amount of money into your company’s growth rather than let it go to waste like that.

The most common reason for this is that a customer who is paying a monthly recurring fee is simply trying the service out, and already thinks about dropping a few months after using it. They didn’t have a strong buy-in initially and, as a result, there is a great chance that the revenues that are generated from them won’t break even with how much it cost to acquire them.

From the customer’s perspective, this makes sense because unless they recognize that there is a great value for them in using your service, then why should they keep paying a monthly fee that’s going to drain their wallet? Paying a lot of money for services that you don’t use is not only annoying, but it also drains your budget and you can’t switch to services that might actually be beneficial.

For a growing SaaS company, it is extremely difficult to convince a customer of the value of your product and the need for them to stay with your company for the long-term unless they personally trust and know your brand really well.

If you don’t have a platform that generates significant revenue from running ads like Facebook, you have to find a way to monetize yourself which is basically presenting the customer with an attractive offer that will convince them to buy in and stay for the long-term.

There are many SaaS companies that offer discounts for a one or two-year upfront commitment. This strategy makes sense because your business receives guaranteed upfront cash payments to finance the growth of the company. Also, your customers demonstrate a much stronger buy-in such that they have an incentive to engage more with your service because they just bought it for the whole year.

Obviously, the trick here is finding the right discount rate that will unlock the customer’s buy-in and still enable your business to make a profit. The discount rate is advantageous for the customer because they could be saving lots of money by paying the cash up front. However, it’s also in your favor because you don’t have to worry about losing your customers next month. You reduce your churn rate and get an instant cash boost that you can grow the business with.

Theoretically, you need to know a typical customer’s average lifetime and their monthly churn rate (which is the probability that they will drop out next month).

You can read industry reports of well known consulting companies to get an idea about these statistics if you don’t have the means to statistically analyze an entire market or the behavior of its participants.

However, you can also make some assumptions and write out the math on Excel to give yourself a rough idea of what a theoretical scenario might look like.

If you know your monthly revenue and the total number of customers, you can divide the first number by the second number to get the average value per customer. Further, if the customer average lifetime is 12 months, then you can simply multiply the value given by the first step with the number of months, which is 12 in this example. This is the ideal case, however, where there is no customer churn. You should also calculate a more realistic case where you would discount your future payouts by that churn rate. The difference between two numbers, divided by the LTV under no-churn, gives you the maximum discount rate you can apply.

If you are a small SaaS company, focus on simplicity. Don’t take shortcuts, but also don’t spend months determining this answer because CLTV is one cog in a bigger machine that needs to turn to make you money. Start by calculating LTV in the simplest way possible with all the metrics that you can gather. As your business grows, you will be able to acquire more customer data which will help you in calculating LTV more accurately.

You can’t apply theory exactly to every real-life situation. However, a discounted annual prepayment offers tremendous benefits for both the customer and the business.

First, customers get a strong incentive to take full advantage of their membership by using more of its features a lot more frequently to get the most value. Second, they familiarize themselves with the product or service much better and might even decide to continue their relationship when the time comes around for renewal.

Lastly, your customers are also going to like this deal more because they free up additional cash in their monthly budgets. Without a monthly recurring bill to pay, they can invest the extra cash, use for education or other personal development. When they pay up front instead of paying in small pieces at the end of every month, they even get an extra emergency cushion of monthly cash.

Applying a couple of more assumptions, we get growth trajectories like this:

While this graph is based on a simplified hypothetical scenario, you can use your own data and assumptions to see what the effects of prepayments be on the growth of your business. As you can see with this example, even an unnecessarily aggressive discounting method yields a larger customer base than a purely monthly fee-based business model.

In order to advertise your business via platforms that will connect your offerings with consumers, you can work with organizations that can feature your services on their websites. I found this platform that offers a direct interface where the consumers can show interest in the services of businesses and pay cash upfront for 1 to 2-year contracts. Organizations like these relieve your business of the large marketing costs to acquire new customers, as you simply take advantage of their platform’s user-base to market your products.

This can be a great deal for your company in order to secure cheap growth capital (cheaper than the cost of debt that you would get from a typical bank as a small and growing company) through advance cash payments. You can reduce your costs, maximize retention, and grow your business faster than just relying on monthly fees alone.

In conclusion, you should offer more prepayment options for your services if you don’t do that already. You should seek out to build partnerships with organizations with a mission to help their users reduce their expenses. Ubund is one such platform that delivers consolidated groups of customers with 1–2 or more years of pre-payment of their services against a discount on the list price. The value-add of your discounted offerings would draw especially more attention on these platforms whose users are looking to get value of out of useful services without hurting their wallet. Therefore, this strategy would help you grow your cash balances, expand your reach, and build a loyal customer base.

Author’s Bio: Cem Vardar has recently started wading the waters of personal finance and the fin-tech industry. I want to increase awareness on personal finance topics and help people find ways to get out of debt.

I like writing about personal finance and technology.