How Do I Reduce Churn and Optimize LTV?
You can see that churn is one of the more critical factors to improve and eliminate, because it factors so heavily in the LTV formula. However, you can drastically reduce churn by ensuring your customers are paying an amount that aligns perfectly with the value they place in your product. Pricing customer fit is an essential part of keeping profitable customers onboard, so let’s take a look at how we can use our pricing strategy in this way to cut your churn rate and consequently increase customer LTV.
1. Align your pricing along a value metric
A huge proportion of customers churn out when they can’t see value in what they’re actually paying for, so a critical part of a killer pricing strategy that reduces churn is making sure your pricing is clearly aligned with the value you’re providing your customers. This is called pricing along a “value metric,” and it essentially means as customers receive more value from using your product (through number of users, bandwidth, etc.), you charge them more for each unit of value they’re receiving.
Customers will typically stick around longer and pay higher rates if they know exactly what they’re paying for and how much value they’re receiving at a particular price. Pricing along a value metric also guarantees that you can communicate changes in price and justify them from one plan to the next. If the price of each tier is proportional to the value received, it will ensure you can upsell existing customers to premium products and profitable plan upgrades as their own businesses grow (for more on value metrics and structuring your plans, check out this post on pricing page best practices here).
2. Assign a customer persona to each product tier
Price changes are definitely easier to communicate when you’re adding features and increasing functionality to justify those changes. However, it’s just as important to make sure each tier for your product is aligned to a specific customer segment that you’re targeting. We already mentioned how crucial it is to quantify the range of customer personas you can serve in last week’s post on acquisition, but once you define your customer personas, ensure every target lines up with the pricing and value provided in a particular plan. A significant reason for a high churn rate is the inability to provide an appropriate amount of service to the right buyers at a price they’re willing to pay.
3. Determine price sensitivity
It may seem obvious that your customers’ price sensitivity would have a significant impact on your churn rate, but knowing how much each of your customer personas is willing to pay is also a great indicator of whether you need to go back to the drawing board with regard to your product. If none of your target customers are willing to pay a price that allows you to quickly recoup your CAC, then it may be time to question what you're building as well as to whom you’re selling.
On the flipside, you may find that price sensitivity data collected from your customers indicates that you can raise prices without turning your customers off. In this case, the focus won’t be on decreasing your churn to increase LTV, but increasing your ARPA to produce the same result. Either way, it’s valuable data that can give you further insight into what’s affecting the health of your business and what can be done to improve it via your pricing strategy.