Growth. That’s the core of what we want to achieve as a SaaS Startup business.
Our goal - we all want ‘Hockey Curve’ growth.
It takes time to achieve a baseline to reach the coveted ‘Hockey Curve’ growth.
Hiring or raising capital to accelerate growth is only part of the answer.
There’s no point scaling if churn is too high or you have hit some sort of growth ceiling.
It comes down to having raving, loyal customers - and making the most of them.
So, what does this mean exactly?
Raving, loyal customers = Increased ARPU (Average Revenue Per User).
When looking for hyper growth and scale, one of the best ways to achieve this is increasing the revenue of each customer.
As a SaaS startup, there are many metrics to be across consistently as part of your business.
One of those metrics is ARPU - Average Revenue Per User.
So what is ARPU?
In simple terms, ARPU means the amount a business can generate from a customer over a period, typically per month or per year.
There are other acronyms out there such as ARPA (Average Revenue Per Account) and APRC (with C meaning ‘Customer’), but they all mean the same thing.
ARPU (Monthly) = Total MRR / Total Active Subscriptions (Users)
What timeframe do you calculate ARPU?
Typically, whilst stated above it could be in monthly or yearly, it’s normally standard to measure it monthly. So if you’re a subscription business and charge monthly, you would measure ARPU by month.
However, what happens if you’re a business like Hotels.com where it’s not a subscription business?
In this scenario, they would most likely look at measuring APRU per quarter or on a yearly basis. Again, this is just a simple example, but you get what I am saying.
It’s not hyper critical to implement ARPU strategies at the early stages of a new SaaS company, however it is vital to understand what it means and the impact on the bottom line and growth of your SaaS business.
ARPU helps you understand the value of your customers. That means by knowing your ARPU and looking into customer data, this means you can price effectively and also understand the value you provide to your users.
When looking at your APRU, you can break it down into various segments to understand what an average user is paying for our product and have the ability to make short and long term decisions around product and growth.
Making better business decisions by knowing your APRU in detail will in turn help you spur strong MRR growth and additionally increase LTV.
Pricing is one of the easiest ways to increase ARPU for your SaaS company instantaneously.
In fact, the most famous SaaS and startup companies change pricing when they build new product features they know will attract new customers and also try to upgrade existing customers.
However if not carefully planned and then potentially having leakages in the execution, you could end up with poor results in terms of acquisition and let alone, unsatisfied existing customers.
Price increases as stated above are a great way to increase ARPU quite quickly.
A great article by Sixteen Ventures dissects how Stormpulse increased their pricing by 10x. In fact, they even changed their business model from freemium to premium-only features which include a Free Trial period.
Of course, this is a big shift telling low-end tier customers or those using the platform as part of the freemium plan, to move to paid use only.
The results - it went so well they managed to track nearly $100,000 in revenue for the month they announced.
You can read all the lessons and the reasons why in the link above (and highly encourage you to do so).
What I can tell you is that they increased prices and were successful in doing so as they knew they had a product which was providing incredible value.
They had the data to back it up and could see that whilst there was some risk factor, they knew they were leaving big money on the table if they didn’t switch up their business model and change their pricing.
However, whilst it worked out for Stormpulse, there’s simply no copy and paste method for what worked for one company that would then work for another.
So, when is it the right time to increase prices?
What are the signals that prompt a SaaS company to increase prices and the result paying off dividends?
Well, there’s no one right answer.
Jason Lemkin, the founder of SaaStr and former co-founder of EchoSign (acquired by Adobe), shared some amazing tips from his experience with his SaaS companies which have gone onto being very successful.
To add more complexity into the mix around when to raise pricing, it also comes to the growth stage of the company which Jason also highlights.
To summarise key takeaways for raising prices which Jason shares, here is some food for thought and useful tips around raising prices;
There are other amazing resources out there about increasing prices which can help you.
Here’s three posts to read:
What are scalable pricing models? This is what I’m referring to:
(Image source: Campaign Monitor)
Often at the early stages of a product, price is typically flat lined and normally starts off with a 3 tiered pricing model, like we see with many products today.
That’s totally fine, especially in the early stages as your primary focus should be traction and increasing signups with pricing that makes sense.
At the early stages you’re unsure of the key features people will get value from until you get enough data and product maturity.
However, when it comes to pricing with products that have already experienced traction and a loyal customer base, their focus changes to try and increase APRU.
This pricing model is a great way to cater for any new acquired customers.
It’s great for two reasons;
The best way you can “match” the value you can provide and cater for a users’ needs is based on any of these scalable key pricing factors;
David Skok (one of my favourite entrepreneurs) wrote this great article for scalable pricing. Worth the read to understand what it could mean for the growth of your business.
Scalable pricing is not straightforward (and to be honest, at Cenario we’re still thinking about whether or not this works for our customers at this current stage), however it’s definitely got some upside to achieve higher ARPU.
Bundling products is an awesome way to achieve ARPU if it makes sense for your SaaS business.
We are often seen with many examples of Product Bundling strategies in the B2C world or in particular, with eCommerce.
Yet, many SaaS companies haven’t cracked what makes a compelling SaaS Bundle offering (and nothing comes to mind personally right away for an offer which was part of the bundle).
The answer simply is - there never is an “optimal” SaaS Product Bundle… or in other words, not one size fits all.
It comes down to continued experimentation and testing through data.
So, what are the benefits of Product Bundling in the SaaS world?
Some of the world’s greatest SaaS startup companies have used product bundling for competitive advantage such as Zendesk and Intercom. The examples in the article show over time the evolution of product bundling from these two companies to highlight how companies continue to reiterate in order to acquire and retain new customers.
Whilst we know product bundling isn’t a one size fits all approach, if you do bundling, you need to ensure key factors are addressed and made crystal clear to customers
In a great article by AppDirect on product bundling, they talk about it being a delicate balance between the actual products you sell and the value customers receive that will keep them.
If you can balance both and do it right, then a bundling strategy will certainly be a strong growth strategy to acquire customers and then retain them.
Up-selling and Cross-selling is one of the easier strategies after increasing prices to implement in getting existing customers to upgrade or try new services.
Why is it so important for startup success?
Pretty simple, right? Your existing customers are your best customers. They are already loyal to you.
So then how do you go about choosing which features to up-sell/cross-sell?
You’ve got two things;
Knowing how your existing customers work within the product by looking at data and even product recordings, you will have the ability to work out and prioritise which new product features or offerings will work for up-selling or cross-selling.
Of course, where the challenge then comes in is understanding what to prioritise that a majority of your users would be interested in. As after all, some users will like some particular features, and others would prefer other features. Hence, data should help you with this answer.
A couple of examples of really great SaaS Up-sells to help inspire;
SendGrid highlighting through a pop-up a new service for Multichannel prospecting ads and asking specific users if they want to book a demo. Credit: TryChamelon
Trello uses a banner to help highlight to users of how the free plans works. Messaging is friendly and points me in the right direction about the premium plans. Credit: TryChameleon
If you need inspiration or see examples of how other top SaaS companies implement prompts or tactics to up-sell or cross-sell users, these two resources below are great!
Another way to increase ARPU over time is ultimately to have a relentless focus on reducing churn.
If you reduce churn, you achieve a higher CLTV. Additionally, you have more ‘time’ to do up-sell and cross-sell strategies.
It’s a simple equation after all. Happy loyal customers = best customers to sell more to.
If you really want to focus on making sure you have loyal customers for the long term, you need to focus on building robust ‘churn reduction strategies’. Some strategies include;
In another blog post we will share the details of these strategies in action.
However, sometimes even with an incredible product, some customers just decide to leave for reasons we aren’t sure about.
No matter how many NPS surveys we send or offers we send them, if they decide to churn, then they most likely have churned for good.
Not all is lost though. You can still win them back.
One way to help alleviate this is also focusing on reactivation of ‘churned’ customers.
Reactivation is focused more on understanding why they left and how you can change their mind.
You can offer them discounts or other offers to try to win them back.
Although the biggest winner is sending a personalised email or message, asking them an honest reason why. Why? Because they were loyal customers before. No NPS score survey tool or automated offer will ever truly help reactivate a customer.
We’ve touched on this earlier, but we haven’t brought up these words - focus your product on growth.
What do I mean by this?
Any way you can see more value being added to your product that your customers will love, you should strongly consider doing it that is complementary to the core product offering.
As an example to paint a better picture, ConvertKit started off as an email marketing platform, but has now evolved into offerings to help their existing customers with their marketing funnels by now including landing pages into their product suite.
It makes complete sense to do this.
Now loyal, raving customers (and there are many of them) have the capabilities to control more functions of their marketing funnels.
Without a doubt, this in turn would help them with their ARPU.
For your pleasure, you can read more about the ConvertKit growth story.
Got any questions or comments? Let us know in the comments below!