How To Perform Customer Profitability Analysis and Use It To Maximize Your Revenue?
Are you considering performing customer profitability analysis for your business?
Due to many variables affecting the final result, estimating customer profitability can be challenging. Perhaps you have already experienced this.
Here, we will take every challenging aspect of measuring customer profitability and convert it into easy-to-implement pieces of advice so that you can finally determine how much profit a specific customer contributes.
Let’s get down to business!
- Customer profitability analysis explains how much money a particular customer generates for your business. It compares the costs of acquiring and retaining customers with the profits generated from them.
- Once you complete a customer profitability analysis, you will recognize the best customer segment you should target to maximize annual profit and ways to improve customer retention strategy and reduce customer costs.
- To calculate customer profitability, you first should find two metrics — customer lifetime value and average revenue per user.
- Next, you need to perform a customer profitability analysis:
1. Identify all your business expenses and touchpoints. Think about the sales funnel and the customer journey. How might a customer interact with your company?
2. Segment customers and group them into cohorts to determine which customers generate significant revenue and which ones are draining your business.
3. Calculate revenue for each segment, and then analyze the profitability of each segment.
- To maximize customer profitability, you can use a microsurvey in the welcome flow to first gather data about customers and then personalize the primary onboarding path based on customer needs to take them to the activation stage faster.
- You can also use modals to contextually prompt users to upgrade their accounts and implement an in-app resource center to reduce customer service costs.
What Is Customer Profitability Analysis?
A customer profitability analysis explains how much money a particular customer or customer segment generates for your business. It compares the expenses incurred in acquiring and retaining that customer against the profit generated from the customer.
In SaaS, we must calculate customer profitability to understand what segment we should pay more attention to, to gain more money with fewer expenses, what product pricing to set, etc.
What are the benefits of customer profitability analysis?
Customer profitability analysis affects various business aspects, from the sales process to product development priorities to expanding a customer success team.
Let’s get more granular.
Helps you minimize costs
Customer profitability analysis helps you find the user groups who cost more than generate revenue for the company. Knowing them, you can reduce the expenses on customer support by creating a comprehensive knowledge base and/or secondary onboarding flow.
Understand which is the best customer segment you should target
Establishing customer profitability also helps to spot the most attractive segment to focus on regarding its profitability. You can prioritize your customer success team efforts to that segment to provide a better service, thus generating more revenue. For instance, turning base users into power users and brand advocates.
Increase product improvements efficiency
There are times when it’s not about whimsical clients pestering your customer service department, resulting in high expenses. In some cases, it is because they deal with the same product inadequacies or bugs over and over again.
When you encounter such issues with a customer segment, don’t cut off support. In such cases, it’s better to dig deeper and identify the cause. Eventually, you will realize that the problem was a result of internal operational problems.
Improve customer retention
For the customers with the highest profitability, companies can afford to offer exceptional customer service. That means companies can spend more on serving those elite customers by providing dedicated customer success managers or individual solutions.
How far can you go with extra care? Analyze customer profitability to find out your numbers to remain profitable.
How to calculate customer profitability?
If you have searched Google before, you may have found very complex formulas with a laundry list of variables for measuring customer profitability.
But honestly, you don’t need them. There are two simple ways to calculate customer profitability by identifying customer lifetime value and average revenue per user.
Let’s learn how to find each.
Customer lifetime value
Customer lifetime value (CLV or LTV) shows you the average amount of money a particular customer brings you over the period they are using and paying for your product.
Think of it as Gross LTV.
However, you can dig deeper and gauge your Net LTV by subtracting the cost of acquiring a given customer and servicing their account. It gives you a more accurate reflection on earnings per user.
That matters because increasing LTV improves the overall profitability of SaaS companies.
Average Revenue per User
Average Revenue per User (ARPU) can tell you how much revenue you generate from a user. To calculate this, simply divide your monthly recurring revenue (MRR) by the total number of paying users.
As for a business, you should know this metric to delve further and compare it against the average expenses per customer. If you’re satisfied with your profit, you’re doing great!
If not, it’s time to perform a customer profitability analysis.
How to perform customer profitability analysis in 4 steps?
Customer profitability analysis consists of four essential steps. Each provides you with additional insights into your overall business strategy and health.
Let’s get started.
Identify all touchpoints and business expenses
Our first step in conducting customer profitability analysis is to identify all your touchpoints and business expenses. Think back on the sales funnel and the customer journey. Remember what areas of your company a customer might engage with:
- How do users find you? Which marketing channels do they use?
- Do they interact with salespeople?
- What does your customer success care cost?
Once you’ve completed this audit, identify exactly how much it costs to maintain each channel.
Segment customers and group them into cohorts
Customer profitability analysis is not about finding the average revenue generated and comparing it against all business spending. Instead, you should find the most profitable customer group and the one that is draining your business. Then, you will be able to act on both to increase your net profit.
To segment customers into cohorts, use their in-app behavior, subscription plan, location, etc. You might want to find out what features your users pay top dollar for.
Calculate revenue for each segment
The next step is to figure out the annual revenue for each customer segment. Simply add up the revenue of each segment.
Next, we will calculate the annual cost per customer group. Consider sales and marketing costs, support and customer success department costs, product development, and other touchpoints.
Then calculate each cohort’s profitability.
Collect data and analyze profitability
Once you get your numbers, move on to brainstorming. You are going to look for answers to the following situations:
- Customers subscribed to plan A are generating 25% of revenue, but their maintenance costs x2 against users on plan B, which bring 35% of revenue. Should we shut down plan A and pull users to plan B with a one-time 35% discount on the annual subscription?
- Users with moderate profitability engage with only two features of the product. Why?
Basically, you will want to investigate every number in order to determine what factors led to it, regardless of whether it is good or bad.
Customer profitability analysis example
So let’s exemplify all our learnings to make customer profitability analysis a crystal-clear and easy to carry out.
Let’s imagine our SaaS product is a tool for SEO, PPC, and digital marketing specialists. It has a great number of features tailored to the needs of each customer role.
At this point, we are not satisfied with the net profit and our growth rate. So we need to conduct customer profitability analysis to detect insufficient areas of the business strategy and optimize them.
In doing so, first, we segmented users by roles and calculated the MRR, ARPU, and LTV of each customer group. This showed that we stand to gain more money from the SEO cohort than from PPC and digital marketing.
When we summed up expenses to maintain each cohort (marketing efforts, customer support, product development, sales, and accounting), it turned out the PPC cohort is unprofitable customers with sky-high servicing costs.
This led us to design a great personalized onboarding flow for PPC specialists to mitigate the customer support caseload.
4 strategies to maximize customer profitability
Now that you know what it takes to gauge customer profitability, let’s learn strategies to maximize your profit for different occasions.
Use a microsurvey in the welcome flow to understand customers better
Welcome screens are more than just for greeting users despite their naming. Product managers and customer success teams use these microsurveys in the welcome flow to collect details about personas and personalize the onboarding flow to get users to experience value faster.
Knowing your customers also enables you to tailor your marketing strategy to attract the right audience.
Below is a great example of Postfity’s welcome flow that pulls users to the personalized onboarding flow once they answer three questions.
Personalize the onboarding process to increase the trial to paid conversion rate
Here we are going to talk a little more about welcome screen usage and how it contributes to revenue growth.
Using the data from the welcome surveys, you should personalize the primary onboarding path based on customer needs and take them to the activation stage faster. This means you will decrease time to value, which leads to a higher trial to paid conversion rate — hence, higher revenue.
But please, when designing your product onboarding, don’t fall for long boring product tours when you watch a video with 1-2-3 steps you are supposed to replicate. It’s old school.
Instead, implement interactive walkthroughs and checklists. You can see Kontentino’s example of an interactive walkthrough for SaaS. They guide a user on how to work inside their product and complete a particular task. Next, a user should replicate those steps, therefore, progressing to the activation point.
Use modals or tooltips to contextually prompt users to upgrade their accounts
In SaaS, we often charge users more for extra limits, access to specific features, API, etc. But users don’t track if they are running out of limits every day. They just do their job.
It’s our duty to notify our customers when they are about to lose the ability to perform their tasks. This is also a great opportunity to upgrade or cross-sale them.
To automate those notifications and prompt users to upgrade their accounts, use modals or tooltips. But do it contextually. You need to show the right prompting message when it’s relevant for the user. Check out how Zapier does it.
You can also increase customer profitability by showcasing your premium features and granting trial access to them, so users can play around and get hooked on them.
Use an in-app resource center to reduce customer service costs
To cut off the servicing costs and enhance customer loyalty, design a knowledge base center. This includes multiple types of resources that educate users — how-to guides, customer stories, micro-videos, and FAQs so that users can find answers on their own.
Plus, you can add a button to open chat and contact a customer support specialist.
An in-app resource center is pretty much the all-in-one, go-to solution for in-app help that drastically reduces the number of support tickets.
A customer profitability analysis puts a new take on how things are going inside your business. It helps you both seize eye-opening insights and the right moment to capitalize on revenue-generating findings and timely detect holes through which you’re losing money.
Want to collect invaluable insights into your users’ in-app behavior and conduct a customer profitability analysis? Get a Userpilot Demo and see how easily you can do it!