How to achieve scalable growth
How can we grow faster? I’m sure that’s what you‘re asking yourself a couple of times a day. It’s only natural. And if you are like most people in SaaS your weapon of choice to achieve scalable growth is simple: Acquiring more customers with reinforced marketing and sales efforts. With a venture capital injection or without.
But is that the best way to grow? Is new customer acquisition the most powerful growth lever? Obviously this was a rhetorical question. Because the answer is no. There are more than one growth levers for your SaaS business. There are 5 (not counting additional services) to be more specific. In order to achieve scalable growth at a peak level you need to master all of them.
Growth efficiency
Let’s start with some statistics. According to research 9 out of 10 SaaS business executives in the sample considered acquiring new customers is a top priority while only 6 respectively 5 said the same for retention and upselling a top priority.
That’s quite interesting isn’t it? Because the least efficient way to generate revenue enjoys the highest priority. That means a whole lot of businesses are missing out on great opportunities.
The 5 levers of growth
Besides acquisition, retention and expansion there are further growth levers in pricing and product development. I’ve put them in order based on considering cost efficiency, implementation time and growth impact. Here’s what i’ve got:
- Pricing
- Upselling
- Retention
- Acquisition
- Product development
1. Pricing
The prize for the most powerful growth lever goes to neither acquisition, upselling nor retention. Research from Profitwell discovered that pricing is 4x more efficient than acquisition and 2x more efficient than retention.
According to Havard Business Review a 1% increase in pricing leads to an average of 11% increase in profits and it’s easy to explain why. Because if your costs don’t change the entire price increase runs into your margin. Pricing is not only a highly efficient growth lever but also the most underrated and least understood. Because on average companies spend only 6 hours building their pricing strategy – not annually, in total.
Increasing your prices by 1% is a no brainer. You could do it by tomorrow and you will increase your profits. Because it’s highly unlikely that new and existing customers will object about a tiny raise (don’t forget to communicate it though). Coming up with a whole new pricing strategy naturally requires more effort. But think about it. If a 1% price increase leads to an 11% increase in profit how much will you benefit from a raise of 5-10%?
What makes pricing so efficient?
Even though a sophisticated approach includes collecting and analyzing customer data the effort is still low and the implementation time short. At the same time pricing offers high scalability and immediate effects. Because the new and increased prices apply to all new customers right away. Depending on your policy and communication prowess you may also adopt them for your existing customers as well.
Upselling, retention and acquisition on the other hand are individual efforts. Increasing the product value through further developments is highly scalable too but it naturally requires more effort and time. And as the vast majority of revenues come after the initial sale you’ve got the cherry on top. Because the higher prices also multiplies with expansions and retentions.
Allow me to add a personal observation on the matter. I’ve studied hundreds of SaaS pricing pages and don’t remember a single one where my first thought was that it feels expensive. But many times i’ve found myself wondering how the respective company could ever make any profits.
How much you can charge depends on your product’s value. And your product’s value is reflected by your customers willingness to pay. That’s why you need to talk to them. Customer feedback goes way beyond feature requests and evaluating your support quality. It determines your whole strategic development.
2. Upselling
Generating new revenue from retention costs only half as much (0.13$ versus 0.28$ to generate 1$ of new revenue) as from expansions. But it has a significantly higher revenue ceiling. Considering a customer with an annual contract for the first year a contract extention would double your LTV. That’s great but that’s it. Contract expansions on the contrary, given that you’ve put proper packaging in place, does not have such a limit.
The high performers in terms of growth use the power of expansions to great extent. They realize nearly 40% of their growth from expansions. Generating 1$ from an investment of 0.28$ would give you a multiplier of almost 4. How long would it take you to get the same from raw acquisitions (which are about 4 times more expensive)?
Upselling also refers to the holy grail of SaaS growth – negative churn. If you are not familiar with it – negative churn happens when the new revenues from expansions exceed the revenue losses from cancelations and downgrades. It has a mystical touch but actually it should be a key priority for any SaaS business. Because as you’ve seen, compensating churn with more acquisitions is quite expensive and will become increasingly harder.
Powerful but non-scalable
Expansions have a huge revenue growth potential. It’s far above any price increase unless your product is hopelessly underpriced. But upselling is not scalable, you can’t sell up everyone and certainly not at any given time.
First it’s unlikely that your customers spend more money on your product without you showing love and appreciation through your customer service and success teams. You have to earn it, customer by customer.
Second you can’t upsell everyone because not all of your customers will need more. That’s why you’ve (hopefully) made different tiers/packages in the first place. And third it will take time until they outgrow their initial package.
3. Retention
As the research has shown earlier extending existing contracts is highly efficient. Retaining customer revenue is roughly 9 times cheaper than generating revenue from new customers and 2x cheaper than upselling.
And that’s perfectly logical. The customers are familiar with the product and when they are happy with their choice extending the contract should be a mere formality. That’s naturally much easier than convincing new customers to buy the product. And also a bit easier than convincing customers to spend more money.
And if you continually increase your prices and expanded contracts every retention will be pure gold. Customer retention keeps the cash flowing and increases the customer lifetime value but it has no direct impact on growth. Because you only keep what you’ve already got. But that’s exactly the point. If you generate 20% new revenues and loose 20% of recurring ones your growth is zero.
Churn
According to McKinsey research a software company that grows at only 20% has a 92% chance of ceasing to exist in a few years.That’s a lot of pressure already for mere survival and that’s most likely not “the dream”.
But only 32% of SaaS businesses are able to keep their churn rate below 5%. If you have to grow at least 20% annually to survive and your churn rate is 10% or higher your challenge becomes insanely harder. But churn does not necessarily mean you loose only future revenues. If the customer departs before the customer acquisition costs are repaid (part of) your investment is lost too.
As we’ve seen earlier through the immense costs of acquiring new customer revenue compensating churn with new acquisitions is a bad idea. You need to stop leaking money first. I did not find any statistics about the matter but i am pretty certain that the costs of recovering churn (assuming you focus on former profitable customers) will be lower too.
4. Acquisition
Finally we’ve reached the top priority for 9 out of 10 SaaS business executives. Obviously acquiring customers is essential for any business, especially in the early stages. Because if you have no customers you can’t raise your prices, sell up and retain. But acquiring new customers is expensive.
What does the research tell us about acquisition? In simple words: Quality beats quantitiy. High growth companies generate 40% more leads than low growth companies but 60% less sales opportunities. What looks odd and counterintuitive at first becomes perfectly clear when it comes to deal size. Because the high growth companies close deals that are 2.8x larger than the average deal size of low growth companies.
They generate higher ACVs and spend less on customer acquisition. Leading to a faster CAC payback and higher LTV to CAC ratios. They’ve achieved high customer acquisition efficiency. If we sum it up the high growth companies focus on acquiring more valuable customers, significantly generate more revenues from expansions and enjoy low churn. Investing in quality pays off.
5. Product development
The main driver of growth is the value of your product. That’s what your customers are paying for. Your product is the most scalable part of your business model and so are your extensions. Even if they are only included in your higher tier packages.
When you increase your product’s value you are injecting new growth into all your other levers too. Because as you will (hopefully) raise your prices when your product becomes more valuable you will acquire, expand and retain on a higher level.
The reason why i ranked it at the end is because it takes a lot of time and effort. At first you need to find out what your customers want, what really creates value and what to do first. The time until you can monetize your efforts is significant.
How to achieve scalable growth
Acquiring new customers is the top priority for most SaaS businesses. But research shows that it’s highly ineffient. Pricing, upselling and retention deliver significantly higher returns on investment. Customer acquisition is merely the seed of growth.
However the fastest growing companies close significantly larger deals. Because they invest in quality. As a result they enjoy high growth from seizing upselling opportunities and realize the lowest churn rates. They maximize the LTV to CAC ratio for every single account.
Pricing, upselling and retention prove to be so important for growth that you should have dedicated resources and processes in place. Maybe you should even consider creating specific job roles like a retention analyst.
What should you do next? Raise your prices, acquire new customers, sell up your existing ones, invest in retention, improve your product and repeat.