Many entrepreneurs have joined the bandwagon of SaaS industry, but they are yet to realize that SaaS growth model is quite different from traditional ones. A deep understanding of SaaS growth levers can take your business to the next level. However, there are multiple factors at play and we will look into them individually in this blog.
SaaS is a growing industry. Without any doubt, with so much flexibility it offers to the entrepreneurs and customers, SaaS is going to eat the world. Standardization is yet to occur in this industry because everyone is in the learning and experimenting phase. There are some 14 courses in SaaS on Udemy itself. Yet, it has not become a part of mainstream education in established universities because a) it is new and b) most of the learnings are happening on the go, that is, when students enter the professional world.
Nevertheless, based on our experience in SaaS industry growth and studying the business strategies of many such companies, we have developed an understanding of growth mechanism that works. So, let’s look into them.
Two growth levers in SaaS
There are many factors involved in the growth of a SaaS business. But for the ease of understanding and remembering, we have classified all of them under two broadest categories. They are:
- Customer Lifetime Value
And to look further, their subcategories are the below ones:
- Increase number of customers
- Lower customer acquisition cost
- Optimize online performance
- Customer Lifetime Value
- Increasing customer retention/reducing customer churn
- Customer account expansion through upsells/cross-sells
Let’s understand each of the above points in detail.
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This is something which is not new in SaaS. For any business to grow, it has to scale its operations to reach more customers. To scale, you have to work on both aspects – quantity as well as quality. The quantitative sides of scaling include measures like increasing the size of customer base and diversifying your product offerings. While qualitative side includes optimizing the online performance as well driving more efficient marketing and sales operations to lower down customer acquisition cost.
Increasing the size of customer base
For any company to grow, it has to acquire more customers by reaching the right product/market fit. It is essential for the companies to attract right-fit customers rather than just any customer. And the biggest onus of this goal comes onto the marketing and sales divisions. It is their responsibility to reach out to the right market, spread awareness of the product, generate qualified leads and finally close them.
Diversify product offerings
This falls under long-term plan, yet cannot be overlooked. If you are selling a particular product for a business solution, there might be many ancillary products around it supporting relevant business operations. While it might not be feasible to build all such products at the beginning, you must keep them under your roadmap to build later. As your primary grows and acquires customers, it is easier to sell ancillary products to generate further growth.
Reduce customer acquisition cost
According to economies of scale principle, the cost of production should reduce as the company grows. The same principle applies to customer acquisition cost (CAC). As you get matured in your niche, you should be able to reduce CAC through following steps:
- By getting more focused on the niche market and hence your target audience so that your marketing efforts generate better returns.
- Growing organically through content marketing which is a long-term plan. Through this you get to show your expertise in a field and acquire customer’s trust.
- Through networking you are able to explore various opportunities like influencer marketing and partnering with other vendors for mutual benefit.
- Creating brand advocates through various customer success efforts.
Optimize online performance
One thing to always keep under check is that your online performance of the product should never be compromised due to scaling. There are online solutions for SaaS providers as they scale to maintain a consistent online performance. E.g. deploying an overlay network on top of public cloud services like AWS, Google cloud or Alibaba cloud. A cloud-based orchestrator can make intelligent decisions on how to route traffic most efficiently between the SaaS provider and its customers.
Customer Lifetime Value
Increasing the number of customers is as valuable as increasing the revenue from each of your customers for overall SaaS business growth. Customer lifetime value is the revenue an average customer generates during their entire tenure of being in relationship with a company. Since SaaS business works on subscription model, the longer you are able to retain your customer, the more revenue they would generate. What more, exploring and leveraging other sources of revenue from those customers also add up to the total SaaS revenue growth.
Increasing customer retention
Research shows that an increase in 5% of customer retention helps boost profit up to 95%. That’s the power of existing customers in a SaaS business. Hence, it is one of the major growth levers for SaaS. As the customers mature and the vendor-customer relationship evolves, the cost of serving them reduces over time. Plus there are many other benefits that result in turning a customer loyal and eventually a brand advocate.
Customer account expansion
This is related to the above point mentioned about diversification of product offering. When you are able to cross-sell other relevant products of your company to your customers, you generate more sources of revenue. What more, when customers are hooked with more products, they tend to become more loyal to your brand. But this needs to be done strategically with a right amount of understanding of consumer behavior.17
The two SaaS growth levers explained in this blog cannot be simplified further. The rule is to generate more value from each customer and acquire and retain more such customers. While there is no limit to the depth you can achieve by gaining a granular vision of these two levers, it is important to always keep the big picture in mind. Efforts required to operationalize each of these two levers include spending in manpower and resources. Hence, a proper evaluation of each unit spending must be done to gain the overall growth of a business.
Rohan has over 11 years of experience in client services, marketing and hospitality field. Previously, he was head of digital marketing for a hi-tech mobile application. Rohan is driven by new challenges and the possibility of making an impact on individuals and businesses.
Published January 18, 2021, Updated March 01, 2023