The ‘Golden Era’ for outlandish SaaS valuations and a reliance on seemingly endless cash injections has come to an end. Soaring inflation and drastically increased interest rates have ended the investors’ sugar high for the Tech sector.
To stay on a growth track and ensure their longevity both in terms of performance as well as valuation, SaaS leaders need to shift their growth mindset from growth at all costs to more sustainable, profitable growth. Better Growth.
We’ve identified three key actions you can take now to unlock sustainable growth for your company.
Action 1: Ensure your packaging and pricing enables you to drive a land & expand motion; now is the time to scale with your customers using a usage-based pricing model
A fundamental action for sustainable growth is to capture the value you deliver with the right packaging and pricing. Most companies spend years improving their product and adding module after module, but don’t take the time to systematically determine the increased value and capture that with smart packaging and pricing. As a result, packaging and pricing models are oftentimes either too simple and one-size-fits-all, or too complex instead of a differentiated packaging structure combined with pricing models that scale.
Customer segmentation based on factual differences in customer needs, not merely on demographics, should be at the heart of any successful monetization strategy. Unless companies can get to this level of granularity and understanding, they’re in danger of missing the mark. Simon-Kucher’s recent survey confirms that the fastest growing SaaS companies across the globe indeed, more often than not, apply a needs-based segmentation.
A needs-based segmentation is at the core of a differentiated packaging and pricing structure that enables you to drive a land-and-expand sales motion. Instead of selling everything you have upon the first deal, a differentiated packaging structure, for example a Good/Better/Best, will allow you to win deals quicker and at the same time ensures you can capture future value by having a clear upsell path as your customer grows or matures.
Differentiated packaging does not imply that a typical Good / Better / Best setup is the best solution for all markets. The end-market is crucial in determining what levels of flexibility you allow. For sustainable growth standardization for SMB is key, while more flexibility should be allowed when catering to Enterprise markets.
A differentiated packaging structure becomes especially powerful when combined with usage-based pricing models. More and more SaaS companies are implementing models that enable you to monetize increased usage over time. We see this happening across all verticals. Make sure you monetize usage that correlates closely to business outcomes and is predictable for your customers. Usage-based pricing will then allow you to grow with your customers when economic conditions take a turn for the better.
Particularly now that IT budgets are being reduced and new IT expenses are reviewed critically, applying a differentiated packaging structure combined with usage-based pricing can be a great measure to still bring in new logos and improve ARR by often more than 20%.
Action 2: Proactively retain and monetize your customer base; now is the time to enable customer success teams with the right insights and get your price increase process in order
In times of economic headwinds, acquisition of new logos will become tougher. This means that SaaS companies should - especially now – also focus on retaining and monetizing their customer base more effectively to boost NRR. However, factual insight in usage patterns or churn risk is often lacking, there are no effective price increase clauses in place, and alignment between CS and Sales is ineffective. Even though the best companies worldwide have an NRR of over 130%, customer base retention and monetization does not get the attention and budgets it deserves!
Whether the aim is to double down on retention or find ways to upsell to high velocity accounts, profitability relies on finding the ability to truly connect with customers. Customer Success teams are pivotal in mapping out opportunities for cross-sell, upsell, expansion, and renewals. They are a crucial piece of the monetization puzzle. Ultimately, when it comes to unlocking greater value from, it’s critical to dissect what elements of the solution customers truly value.
Setting up such a model to predict whether a specific customer is ready for expansion or is likely to churn can be as complex or as simple as needed. A straightforward opportunity/risk assessment model on the most impactful indicators would do, as would a machine learning algorithm for more in-depth insights. Think about factors that truly drive differences across customers such as number of active users, log-in frequency, feature adoption, and usage patterns.
Furthermore, effective price increase clauses should be put in place and the organization ought to be prepared for a diligent annual process. Due to the valuation sugar highs in past years, SaaS companies have lost the ability - or the ‘muscle’ as we often say - to follow through on increasing prices. Over the past years, price increases of SaaS companies have not kept pace with wage increases, and rising cloud prices and general inflation is putting further pressure on margins. If ever there was a necessity and urgency, but also an opportunity to increase prices, it is now.
Shifting focus to base monetization measures through more focus, better insight in expansion opportunities and churn risk, combined with an effective price increase process, will enable sustainable growth even in more challenging economic times.
Action 3: Optimize your go-to-market model; now is the time to get your CAC & CLV under control to maximize the impact from your sales & marketing efforts
Of course, sustainable growth also has to be about adding new logos, also when times get tough. Now that sales cycles are expected to become longer, conversion rates lower and discounts higher, it becomes absolutely crucial that you spend your time on the right target segments and prospects, not on every potential lead. For new logo growth to become sustainable, you need to know your CAC and CLV, on a customer segment level.
A first step to keep CAC under control is clearly defining your focus segments. We see many SaaS companies trying to cater to too many different industries, geographies, and customer sizes at the same time, diluting the impact of their marketing and sales efforts.
Then you need a granular insight into CAC and CLV of your focus segments and translate that into a differentiated go-to-market model. We have seen plenty of cases where sales would spend as much time on converting a €10k deal as a €100k deal. This is not sustainable. The best companies are able to address different deal sizes using different go-to-market models in parallel. We expect that PLG will become the preferred model for deals all the way up to €10-20k annual contract value eventually and that actual field sales should start at around €40k.
Lastly make sure you don’t destroy CLV when trying to win deals by discounting too aggressively. Especially now, it can be tempting to give additional discounts to maintain high conversion rates. However, the lost value is hard to make up for by winning more deals. So please ensure to have a clear conditional discounting framework and escalation guidelines in place, to ensure you capture what you deserve.
Optimizing your go-to-market model by knowing CAC and CLV on a customer segment level, and not destroying value by discounting too aggressively will enable you to add new logos in a sustainable way.
Weathering The Storm
As SaaS adoption slows, it’s clear SaaS companies need to make a transition from growth at all cost to sustainable growth. Better growth.
That’s not to say SaaS companies should take their feet off the acquisition accelerator; but they should coordinate these efforts with optimizing their packaging and pricing, installing strategies to proactively retain and monetize the base, and take a segmented and data-driven approach to your go-to-market model.
To help you succeed in your quest to a more sustainable type of growth, Better Growth, our team will break down each of these topics in the coming months. We will share our perspectives and in-depth insights based on project experiences and industry trends.
Ready to transition to better growth? Contact us to discuss a diverse range of monetization strategies and more.