SaaS companies: Ignore Upsell and Expansion Revenue at your own peril

The fastest growing SaaS companies are using upsells to add more revenue and grow even faster. An upsell is when a company sells more of the same product to you. For SaaS, this is in the form of additional licenses or upgrading to the next product tier. Historically, there hasn’t been much of an emphasis on this component of revenue.

Many companies have used upsells to their advantage — but in today’s market they need to think strategically about it and need to do more of it. Here are three reasons why:

1. UPSELLS HELP YOU COMBAT EVER INCREASING ACQUISITION COSTS

The emergence of many SaaS products in the last few years has increased the amount of marketing and sales dollars spent on acquiring a new customer.

Be it CRMs, marketing automation suites, support help desk software, or tools for recruiting — there are 100s of vendors to choose from. It’s becoming difficult to stand out and the stiff competition is driving sales and marketing costs up.

In a 2013 Pacific Crest SaaS survey, the cost of customer acquisition (CAC) for a new customer was at a median of $0.92 for every dollar of new ACV (average contract value) from a new customer. Contrast that with a median cost of $0.17 for every new incremental dollar of ACV from existing customers. That’s huge — the cost of making $1 more from existing customers is just 19% of the cost of making $1 from new customers.

– Photo courtesy of forentrepreneurs.com

In the same survey done 2 years later, we see how the increase in venture capital and new companies entering the market has brought the cost of acquisition up. In 2015, it costs a median of $1.18 for every dollar of new ACV from a new customer and a median of $0.28 for every new dollar of ACV from existing customers.

– Photo courtesy of forentrepreneurs.com

The immediate impact of the increasing acquisition costs is reflected in the payback period, which is the amount of time it takes to recoup the acquisition cost and start making profits.

Upsells is one way to reduce payback periods and deal with increasing acquisition costs.

2. UPSELLS IS HOW YOU MITIGATE CHURN

Churn is what keeps founders awake at night. Having customers churn who you’ve worked so hard to obtain is painful. But, you will always have some level of churn. It is inevitable.

The best SaaS companies design their upsell mechanics to offset churn. This can lead to something known as negative churn.

Negative churn means that the expanding revenue from existing customers is greater than lost revenue from churn.

For illustration, we make the case with two companies: one with a strong upsell program, and one without. As we can see in the table below, the company with the upsell program has higher growth rates and has achieved negative churn.

3. UPSELLS HELP YOU IDENTIFY YOUR BEST CUSTOMERS

Your customers have a natural trajectory with your product. Most likely they tiptoe through a trial phase before committing to full roll-out. Over time, they either find more value from your product and consume more, or not and churn out.

The best kinds of customers are those who grow with your product.

These kinds of customers are in it for the long haul, because they grow through the ups and downs of your product. They are the most loyal ones and wait for each product release with anticipation.

When you’re starting out, you don’t have a lot of data to tell you who your best customers are. You’re really figuring it out as you go. With your customers increasing their usage of your product, the success milestones start to reveal themselves.

Once you have sufficient data, you can start to draw a timeline of how a successful customer adopts your product. By instrumenting each customer’s lifecycle with success milestones, you’ll know if a customer is on track or requires further onboarding and support. It can also help shape your marketing efforts if you find that a channel is attracting the wrong kinds of customers.

CONCLUSION: SAAS UPSELLS ARE MORE IMPORTANT THAN EVER BEFORE

Our hope is that we’ve presented a convincing argument on why you need to focus on upsell — more now than ever before. Upsells are a win-win for you and your customer, and it’s prudent you ask for the upsell at the right time.

Orignally posted on Silota.com