Understand second order revenue to succeed at customer success

Understand second order revenue to succeed at customer success

Customer success is an essential goal for businesses that provide SaaS solutions on a subscription basis. SaaS customer success refers to the degree to which a customer attains its objectives, derives value, uses the product, and enjoys a positive user experience. In other words, customer success

second order customer success

Customer success is an essential goal for businesses that provide SaaS solutions on a subscription basis. SaaS customer success refers to the degree to which a customer attains its objectives, derives value, uses the product, and enjoys a positive user experience. In other words, customer success occurs when a SaaS product works for the user. When customers can rely on a product to deliver consistent value and help it reach goals, the product will continue to be used, and the news of how the product solved problems and delivered value will spread. And, when a product starts getting buzz as a valuable solution, SaaS providers can leverage other customers’ successes for a new stream: second-order revenue.

second order customer success

The echo effect of happy customers

Second-order revenue is a new business that comes to a company on the heels of customer success. It can take the form of customer referral, or it can mean new business from an employee who used or implemented a SaaS solution at one company but has now moved to another and has recommended the solution.

Businesses know that some of the best leads are referrals. The reason referrals hold so much power and value is that the acquisition costs of a customer recommendation are very low when compared to the investment in time and resources usually required to land a convert a prospect to a customer.

For example, if a company needs to spend $1 to market its product, and another $1 to convert a marketing prospect to a paying customer, its customer acquisition costs (CAC) would be $2. Next, let’s look at the lifetime value (LTV) of this new customer. Let’s say the LTV is $6. In this example, the LTV: CAC is 3:1, which, according to many, is an ideal ratio for new, non-referral customers. 

Second order customers cost less to convert

LTV: CAC ratios are helpful because they give a shorthand account of how many resources business is applying towards new business. A ratio that is closer to 1:1 means that customer acquisition costs are too high. In general, if a business has an LTV: CAC ratio of, say, 5:1, it might indicate that too little is being spent on acquisition. Second orders break this traditional LTV: CAC analysis model because referrals cost much less than attracting, nurturing and converting completely new customers.

Better still, second-order prospects tend to stick. This is because these leads come to a business from referrals of other customer success stories, not from marketing efforts that can miss the mark.

Nurturing second order customers

The value of second-order customers is clear, but the challenge for SaaS companies is how to tap into this low-cost source of ongoing revenue. In this area, SaaS company success comes from successful relationship-building efforts. The key to this success in the SaaS space is found in treating customers like they are prospects — every customer, every month. With this strategy, businesses can amplify the impact of marketing efforts while ensuring that current customers are happy and that they are getting value from their ongoing relationship.

SaaS companies are keenly aware of the factors that indicate customer success problems. Churn rate — the percentage of customers that decide to not renew their SaaS subscriptions — is a lagging indicator of customer success. It alerts businesses that something is wrong, but by the time a business catches wind, the customer has already canceled. Churn rate does, however, provide guidance for fixing potential problems with onboarding, communication, and engagement that can lead to subscription non-renewal. Because of the importance of this metric, SaaS businesses focus on factors that affect churn, such as ensuring a high adoption rate and optimal use. But a strong relationship that prioritizes delivering value throughout the customer journey can minimize churn while also encouraging referrals.

Take your customer’s pulse, and yours, at the same time

The best way to cultivate second-order customers, and minimize churn, is by knowing your current customer sentiment towards your product or service. Net promoter score (NPS) is a metric derived from asking existing customers how likely they are to refer a business to others. Second orders come from successful customers that enjoy using a product.

NPS directly asks if customers are successful and satisfied. A high or positive NPS means that a business has many loyal customers who would proudly stand behind the company. Lower scores can mean too many neutral customers or a growing number of detractors. Neutral customers are the “meh” customers. They might think a product is “ok” or may find certain aspects of the product lacking in features that would warrant a stronger endorsement. Detractors simply do not like a product, and may even actively warn against its use. 

Once NPS is determined, a SaaS provider can adjust activities to work on areas that affect customer success. This might involve opening dialogues with neutrals and detractors to learn the reason for the answers.

Incentivize second orders

With NPS as a baseline, SaaS companies can then engage with current customers to nurture continued goodwill that leads to referral business. Remember, second orders come not only from referrals but also from employees that move from one company to another. SaaS companies should directly ask for referrals from customers by building referral programs and incentivizing second-order activity.

A strong referral program requires the right mix of timing and communication. That means asking at the right time — when the customer experiences a win. This guideline serves two positive purposes for a SaaS business. First, customers are happy when they experience wins, and second, tying customer wins to referral requests means that ongoing customer success management has a framework for constant communication.

The key to turning customer success into second orders is operationalizing all of the activities and components of customer success, from activity tracking to determining customer health, pulse, and NPS. SmartKarrot provides SaaS companies a window into customer activity, gauging product use, engagement, and other factors that determine customer success. SmartKarrot can help businesses optimize onboarding, provide information to customers, and get feedback on factors that influence referral business and upselling opportunities.

For more information on SmartKarrot and how it can help your business treat customers like prospects and effectively sell product benefits with every use, contact us for a free demonstration.

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