Every year, David Skok (via ForEntreprenuers) and Pacific Crest Securities publish an excellent SaaS Benchmarking study on industry performance. One particularly interesting trend is how the sources of revenue change as the fastest-growing SaaS companies develop. Companies that experience the fastest revenue growth have made the most of the old adage that it’s cheaper to work with a customer you already have, than to acquire a new one.
The fact that David has revealed, and that has been consistent from year to year, is fast growing companies book generally at least 10% more of their ACV from upsells than their peers. That this trend was true at both small and large companies is also useful. This is a problem that the best, fastest-growing companies are solving early.
What makes upsell revenue so appealing?
Even at companies under $5M in revenue, there is a substantial difference between the fast-growth companies and the slower ones. It is a strong indication that a company is preparing for exceptionally fast growth if it has engineered a product and buying process that quickly unlocks so much value for itself and its customers.
Fast-growing companies have mastered the art of the upsell, typically sourcing 10% more of their new ACV from existing customers. Image credit: ForEntreprenuers Blog
This is useful guidance if your SaaS company aspires to be a top performer – one key to getting there is finding very efficient channels for getting new revenue. There’s another fact about this upsell revenue that helps explain why it’s so attractive:
These companies have found that upsell revenue is dramatically less expensive to acquire. While the median cost of a new dollar of new ACV is $1.18, the median cost upsell revenue was just $.28. Or, described another way: The fastest growing companies have discovered that they can make a full 25% of their bookings costs 75% less than the rest. The payback period on that ACV is just a calendar quarter instead of more than a year. This is an extremely efficient channel for them that has enabled their rapid growth.
Returning to the first chart we examined, the causes trend along company size isn’t hard to imagine. Companies that failed to find convenient ways to land expansion revenue early will continue to struggle with it as they grow.
Even more of their new revenue each year comes from new customers, who are very expensive to acquire, which forces a slower growth curve as the company has fewer marketing and sales dollars available to fund growth.
The Cost Of New Revenue
$ 1.13Cost Per $1 Of New ACV
$ .28Median Cost Per $1 Of Upsell ACV
Companies can reduce their overall CAC and acquire more revenue in a more efficient fashion by doing more with their customer base.
The spike at the end could be explained as well: As these organizations make it the >$40MM category, they’ve solved this problem to some degree, but still substantially worse than peer companies.
How to pull in more upsell revenue
There are two main strategies you can employ to get more upsell revenue.
1) Sell them more based on their profile attributes
Ask yourself, “Who else in the organization could benefit from our relationship? Is there something we can offer them that makes our relationship more successful for both of us??
Jason Lemkin has written about this a bit. This requires knowing a lot about your customer and having a great relationship with them. You have to be comfortable getting introduced to leaders on teams you have not worked with before. You work on articulating how you can help them while using their connections back to the original users. You need an attentive customer success manager in most cases like this, who understands their business, their challenges, and what kinds of solutions they could be amenable to.
Are you building a CRM product?
Learn how you could get engaged beyond the Sales team – break into marketing, customer success, support, etc. Those teams already have software that they’re using, so explore who the most common providers are and how you could partner with them.
Are you making an app to enable better sales prospecting?
Develop a path for the closing team to use it as well. Find a way to feed data back to Marketing and enable better campaigns for them.
In addition to acquiring this revenue, customers who have a strong partnership with you will practically never cancel. The risk is too great, the rip-out too complicated, and the value that they get from you is too strong.
2) Sell them more based on their usage attributes
Instead of selling into other teams or departments, sell additional usage to someone who’s already using you. Ask yourself, “What else are they doing today that doesn’t involve us?”
Are you making the next great data platform?
What files are they storing outside our system? Consider how you could be a more complete solution for them.
Is only part of their department adopting your solution?
Identify what is preventing the rest of the team from adopting your solution. Are they using a competing solution because of a feature gap? Is it because of a need for better training?
If you price on monthly usage, watch how user behavior changes as they approach their quota, and prioritize upsell activities based on the people who drop off as the end of the period come up. These are customers who want to use more of your product and are holding back because of your pricing model – help them open up the extra usage. They are one step away from asking for an upgrade, and if you ask them instead, you can help bring that value over the line. That also becomes a natural time to expose them to other opportunities and benefits from your product that they have been missing.
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