Zvi Rapps | Marketing Writer
When it comes to selling software, you need to focus not only on the initial sale, but your customer lifetime value (CLV or LTV). What exactly does that mean? The answer is simpler than you might realize: how much will your average customer spend on your products in the future?
In part one of our two part blog series exploring customer lifetime value, we’ll talk about the basics of this critical metric, and how you can increase your LTV through cross-selling and upselling.
Customer Lifetime Value: Why is it Important?
When you know your customer lifetime value, you can make smarter decisions about how much to spend on customer acquisition. After all, paying $150 for a Google AdWords click might be ok if you sell expensive software with an LTV of $50,000, less so if you sell a freemium game where the LTV is $50.
Figuring out what products to offer can also help you build a strong relationship with your customers. That relationship can easily lead to more sales in the future. Whether you’re selling software, grills, or new cars, it’s not easy to sell someone something they don’t want. That’s why getting to know your prospective and existing customers, and what they actually want, is one of the most critical elements of any marketing and sales strategy.
When you better understand the true needs of your existing customers, the potential for recurring revenue increases. With the cost of acquiring new customers thought to be up to 30 times more expensive than the cost of retaining existing ones, the ability to capture revenue opportunities with your existing customers is extremely important.
And the best way to do that is through cross-selling and upselling.
Upselling and Cross-selling: Turning a Spark into a Bonfire
Beyond the simple sale lies the opportunity to provide your customer with value they may not have known they needed, through upselling or cross-selling opportunities. Those terms are often used interchangeably, but what do they mean?
Upselling is when you encourage your customer to upgrade their purchase to a more expensive or premium offering. Cross-selling is when you offer a customer another product that perfectly complements the one they’ve already decided on.
When someone decides to purchase a simple grill for their summer barbecues, but the sales associate encourages them to buy the fancier, more efficient, and more expensive model, that’s an upsell.
When our grill-seeker decides on their barbecue of choice and the salesperson suggests adding a smoker, rain cover and barbecue tool kit to go along with it, that’s cross-selling.
When dealing with software, or any internet-connected device, the opportunities for cross-selling and upselling are significant.
Subscription Software: Time to Start “Cooking with Gas”
In our grill buying scenario, the salesperson has until their customer walks out of the store to pitch them on upgrading their choice, adding a smoker, rain cover, or any other complementary product they can think of. The buyer and seller may never see each other again once the initial purchase is complete. The salesperson also probably doesn’t know much about the buyer’s wants or needs, other than what they’ve mentioned themselves.
Of course, when it comes to software, that doesn’t have to be the case.
As perpetual licenses become less common and subscription models spread, the software buying experience becomes less and less like buying a grill from a random store that doesn’t know you or understand your needs.
With today’s subscription models, relationships between sales professionals and their customers don’t end at a single point of sale.
With this ongoing relationship comes enormous potential to increase your customer’s lifetime value. Your clientele isn’t showing up and then leaving with your product – they are subscribers. That means that you automatically have an ongoing technological relationship. If you’re able to properly track how your customers are using your products, you can better understand what they are using, and what they need. That gives you a critical advantage when it comes to successfully executing cross-sell and upsell opportunities.
Understanding Business Insights Lead to Increased Revenue Opportunities
Across all industries, upselling and cross-selling have become major tools to help software companies capture revenue opportunities and increase customer lifetime value. When it comes to software, the opportunities are already greater, but when you add reliable tracking and the ability to gain business insights from your customers, you have the chance turn up the heat on some huge revenue opportunities.
In part two of our series looking at customer lifetime value, we’ll take a look at the steps you can take to increase LTV using licensing subscription tracking.