The article below is taken from SaaS Mag Issue 2. To order your free copy, click here.
Jim Coleman heads-up operations across multiple SaaS investment fund holdings as Operations Manager for LTV SaaS Growth Fund. His primary focus is on systems-building and optimization, new client onboarding, expansion revenue growth, and churn reduction. Coleman has scaled multiple SaaS businesses and has been involved in several million+ dollar SaaS business sales and acquisitions.
In this article, we are taking a look at his most effective revenue-boosting expansion tactics based on years of operations experience.
Scaling your SaaS via Expansion Revenue
Let’s be real – growth via expansion revenue isn’t as flashy as a massive marketing campaign, but it’s incredibly practical and virtually free. It’s “low hanging fruit” and should be step one of any SaaS growth effort. Peter Drucker famously said, “What gets measured gets managed.” If you’re not already doing this, step one in any effective growth effort is to track your business’ analytics across multiple channels. One of the top metrics to track is ARPU (Average Revenue Per User). This is key and at the heart of any expansion revenue campaign. Quickly defined, growth via expansion revenue is an emphasis on increasing the ARPU of your existing client base. That can be accomplished in a multitude of ways. Here are a few of my top suggestions:
Most SaaS products are priced via bucket plans and quite obviously, the more users you have on your higher-priced plan, the higher your ARPU will be. You may think your clients make buying decisions based on logic, and while that’s true for a minority, the vast majority make choices based on emotion and perceived value. In a recent experiment with one of our portfolio SaaS companies, we implemented a price anchor to see if it would boost our ARPU. Previous to the experiment we had two pricing plans, basic at $9.99 per month and premium at $19.99 per month. For a time we tracked the data for the install rate on our premium plan and found 41% of new users selected that plan. We added a third plan to the mix (Premium Plus) at a significant increase of $99 per month. We offered several incentives on this plan, including phone support and concierge onboarding. In reality, our intention wasn’t to gain new users on this plan, but rather to increase the perceived value of our Premium Plan (now the middle-tier choice).
And… It worked! We have already seen an uptick in the percentage of users selecting our premium vs basic plan. At present 45% of our new users are selecting the Premium Plan (as compared to the previous 41% result). While a 4% uptick may not seem like much, it certainly results in a handsome revenue boost at scale – even more so when you consider this is just one tool in our expansion revenue toolbox. This small change that cost us absolutely nothing to implement, has already put an additional $2k per month in our pockets – and we’re just getting started.
Raise Your Rates
This one seems obvious, but there is much fear in the SaaS industry when it comes to raising rates, especially for existing users. This should go without saying, but you have to know what your top several competitors charge for similar service. Where do you stand as compared to them in terms of price? How about in terms of value?
Tip: Before you consider raising the price for new and existing users, make sure your value proposition is perfectly clear for new prospects and that your existing clients absolutely know and see the value your product brings to them. Don’t flirt with raising your prices until you absolutely know that they know your product’s value.
In most cases, raising rates for new clients will have little negative impact on your conversion rates, so long as you’re delivering the value to match the price. In addition, most of your existing clients won’t squawk about a price increase either, so long as it’s relatively nominal and the value is there. When you’re ready to move on this, start small with a subset of clients. See how that goes. How did it impact your conversion rates? How did it impact churn?
How would the users on your lower tier plan benefit from being on your higher tier plan? Are they aware of these benefits? Creating autoresponder campaigns (Intercom is my favorite tool for this) targeted at your lower pricing tier clients can produce an immense return if done properly. The goal here is to sell them on the value of your higher tier product. What are they missing out on? Why should they care? Consider offering them a free trial on the higher tier plan and then make sure to effectively onboard them to that plan, ensure they’re getting value from it, and then show them the value! If you do these things you’ll be quite pleased at your conversion rate.
Tip: Consider implementing price anchoring first. This will help you more easily sell your new middle-tier plan to lower-tier users as the perceived value is increased.
What add-on products could you add to your existing plans? These could be one-off add-ons and/or monthly add ons. Things like dedicated phone support for extra $ per month, one-time concierge onboarding and setup (assuming this isn’t already included for new users), or live chat support for an extra fee. The options here are endless. It’s the classic, “Would you like fries with that?” play. Offer them something of value that pairs quite nicely with your existing option. You’ll be surprised how many users take you up on these offers; this will most certainly boost your ARPU. Get creative and think outside the box. Put yourself in your client’s shoes and consider what additional needs they have that you could fill.
Scale your SaaS by Switching Your Pricing Strategy
Most SaaS products are priced via “bucket pricing,” which basically means for X dollars per month you get X number of benefits. The more you pay, the more options you get. Many SaaS companies have abandoned this somewhat old-fashioned approach in lieu of usage-based pricing. Intercom is a classic example of usage pricing perfectly executed. The more users you have in their system, the more you pay. And that seems fair, right? The amount paid closely matches the value received. The reality is, as your client’s business scales, so should yours. Having usage-based pricing allows you to steadily (and fairly) increase the amount you earn per client. When they grow, so do you.
The truth is when most of us think of growth the first thing that comes to mind is new client acquisition. I don’t mean to rain on that parade–acquisition is important–but it’ll always be more difficult and more expensive than simply increasing the revenue your current clients pay you. Go for the low-hanging fruit first by maximizing your existing client base. You worked hard to earn their business (and likely spent a lot of money), so it makes good sense to work just as hard to keep and grow their business. Implement one strategy from above at a time into your business. Remember, what gets measured gets managed and data is king. Know your numbers and get cracking on scaling your SaaS via expansion revenue!