There’s Only Three Levers to Grow a SaaS Business

I’m fascinated by the software as a service (SaaS) business model and how it’s enabling a new breed of company to build innovative products, create categories, rewrite go-to-market playbooks, and change the world.

While building and launching a product is one thing, continually iterating on it and providing services that people want to use year after year is quite another. The best SaaS companies develop strategies which impact and help improve product, revenue and churn. But what are the levers which can help SaaS companies to grow? It’s an intriguing area, that requires multiple teams to work cross-functionally.

While product and revenue are extremely important, let’s be clear - churn is the biggest threat to any SaaS business. There’s no point sales and marketing acquiring new customers if they churn quickly. It’s like a leaky bucket - you need to focus on fixing holes in the bucket before you can begin thinking about filling it with more water.

There are numerous tactics which can help SaaS businesses to acquire and retain new customers, as well as increase their spend, but ultimately they all come back to the three levers of SaaS growth, which are:

1. Increase the number of customers
SaaS companies need new customers to help the business grow and show their product has achieved product/market fit. This role falls squarely to the marketing and sales teams - marketing is responsible for building awareness, generating and then nurturing leads, which the sales team qualifies and closes.

But to ensure this happens, you must execute flawlessly. You need to build a high performing sales and marketing engine that generates enough high quality leads for your sales team to close each month. Investing in sales and marketing is how SaaS businesses pour fuel on the fire, and grow exponentially, rather than organically.

However, as companies grow its customer acquisition costs (CAC) typically increases, so ensuring that sales and marketing are targeting right fit businesses, and that there’s a retention plan is place is crucial. You want to chase the right revenue, rather than any revenue. That being said, first mover advantage is hugely important in the fast paced world of SaaS, and the company which gets there first often wins.

Remember, there’s only one way to increase the total number of customers - you need to ensure less customers are churning than being acquired. That’s the secret to increasing the total number of customers, but in truth, it is often overlooked in favour of pure customer acquisition.

2. Increase average revenue per user (ARPU)
While each SaaS company approaches increasing ARPU differently, they all recognise how important it is as a driver of growth. Fortunately, businesses have a number of strategies they can deploy which will positively impact this metric.

Increasing price is perhaps the most immediate solution, and while this approach is akin to using brute force, it typically pays dividends quickly and easily. It’s the one lever businesses leaders can pull that immediately and directly impacts revenue. A word of caution, if your customers are particularly price sensitive or if you’re operating in a competitive market, this can have an adverse effect.

A related, but more nuanced approach is refining pricing tiers. By removing unneeded pricing tiers you can often increase ARPU without raising prices - you’re simply nudging clients towards a higher value product. There’s no right or wrong answer here, you’ll need to test what works and drives revenue. However, a well documented example is Teamwork.com, it reduced its pricing tiers from five to three and saw a 20% increase in ARPU, and this kind of uptick would not be uncommon.

Up and cross-selling are also important strategies for SaaS businesses. Up-selling encompasses the sale of additional features, product add-ons and services, while cross-selling refers to completely different products or services. The best SaaS product teams are continually innovating, so they are in effect, giving their sales teams more to sell. Who is best placed to do up and cross-selling? During various times at HubSpot, sales reps, customer success managers and specific “SWAT” teams have all had the opportunity to up and cross-sell to our customers, but again it comes back to testing what works best for your business.

Another successful strategy to increase ARPU is getting other businesses to sell your product via partner and affiliate channels. Partners programs are increasingly common within the SaaS industry and they help businesses increase the reach and distribution of the sales efforts, although they sacrifice a level of control in the process. The same is also true of affiliate programs.

3. Reduce customer churn
Retention is the foundation of growth for SaaS companies, but in truth, it is often overlooked and undervalued. High churn is fatal in the SaaS industry. It shackles growth, is a source of friction and rightly raises tough questions about product/market fit.

Why is retention so vital to growth? It all comes down to unit economics - quite simply it is much cheaper to retain customers than acquire new ones. That’s why most SaaS companies have a customer success team whose role is to ensure clients succeed and therefore mitigate churn. To help reduce churn, customer success teams need to identify, track and optimise red flag metrics - the numbers which indicate if a client is likely to churn (usage rates, last login date and customer satisfaction are potential examples).

Although, customer success teams speak with clients day in, day out, reducing churn is a team sport - you need a first rate product, onboarding experience, support and services, as well as a customer success team to succeed.

When people refer to churn, they often think in terms of cancellations, but research from Price Intelligently found 20-40% of churn is delinquent. In this context, delinquent churn refers to companies that want to remain a customer, but its credit card has expired or for some reason payment has failed (such as new security protocols being introduced at a bank).

There’s other research which suggest that integrations with other products help SaaS businesses reduce churn. This makes perfect sense - integrations often provide customers with more value, which in turn increases usage and gives them more reasons to engage with your product. It’s a virtuous circle, and you should consider building or enabling other companies to build products that integrate with yours.

SaaS growth levers in action
This post has focussed on why and how SaaS businesses need to develop specific strategies for each of the three growth levers. Now let’s take a look at the results businesses can achieve by optimising each lever.

Although, the scenarios are made up, the table below shows how each growth lever acts as a multiplier and that incremental improvements can have a transformational impact on the performance of a SaaS business.

Metric

Scenario A

Scenario B

Difference

ARPU

$100K

$120k

+20%

Number of customers

1K

1.2k

+20%

Annual churn rate

10%

5%

-50%

ARR

$90 million

$136.8 million

+52%

Where SaaS businesses choose to invest their time, energy and money is hugely important. They need to strike the fine balance between customer acquisition, account growth and retention. While sales and marketing may be more high profile, retention and reducing churn is key to growing a successful SaaS business. It’s pointless fuelling rapid growth if it’s unsustainable.

The best SaaS companies understand how to retain customers, all the while increasing ARPU, and once these metrics have created a flywheel effect, they then (and only then) double down on customer acquisition with sales and marketing. That’s the winning growth playbook followed by the leading SaaS businesses.