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May 2, 2020
Generate more revenue from your customers
Welcome to May.
You’ve read lots of references here lately to the work of the Revenue Collective.
That’s because they consistently produce some of the best content I find, at least for you and other readers of Driven.
This week is no exception. They offered 3 outstanding webinars, one of which I summarize here today.
In this week’s issue…
We look at one topic in some depth:
- How to grow SaaS revenue when fewer new accounts are buying
Your reading time is about 9 minutes, assuming you read at 200 words per minute.
REVENUE | STRATEGY | PRICING
How to grow revenue when fewer new accounts are buying
For many SaaS providers, target accounts have switched to cost-cutting mode. They’ve put new purchases on hold.
So it’s harder to close new accounts.
In this environment, what are your best strategies to maximize subscription revenue from accounts?
Why it matters now
Many customers and prospects have undergone a psychological shock since mid-March. Some have also been through a big financial shock. The priorities of many potential customers have shifted.
Like other upheavals, this situation presents both threats and opportunities. The challenge, I’m afraid, is a platitude. It’s to avoid the threats and capitalize on the opportunities (and still get home by 6:00).
An up-to-date view across the subscription industry
The growth of subscription revenue was the topic of a timely webinar from Revenue Collective this past week.
Both companies work with clients that offer subscription services.
Substribe, based in the U.K., offers consulting services to companies in the B2B subscription business.
ProfitWell is a SaaS company that serves many kinds of subscription companies–not just B2B or Saas. Their clients include direct-to-consumer (D2C) and other ecommerce brands.
Patrick offered insights from a mother lode of unique data that ProfitWell collects about the economics of subscription services.
Why does ProfitWell have so much data, and how is it unique?
The company’s core product, ProfitWell Metrics, is a free system for tracking financial metrics. It serves about 20% of U.S. companies that offer subscription services.
From ProfitWell’s anonymized client data, they compile and share industry trends.
What’s happened since COVID-19
The following chart shows growth by by day since the beginning of 2020. It includes all ProfitWell’s clients, across B2B and B2C.
You can see that revenue started falling in mid-March, coincident with widespread stay-at-home orders in the United States,
B2B SaaS revenue flattens
The following chart, in contrast, shows one sub-segment of the subscription industry. If focuses on revenue for B2B SaaS providers who use ProfitWell.
You see that revenue for this group flattened in mid-March, but it hasn’t gone negative.
To adapt to this suddenly changed environment for B2B SaaS, Patrick shares 7 recommendations to maintain or reinvigorate revenue growth.
1. Fight hard to keep your current customers.
Do everything you can to hold onto your paying customers, even if they want discounts.
“Whoever holds on to the most users or customers will win.”
2. Set up a triage system with a salvage strategy.
If accounts call to cancel a renewal, refer them to a salvage team. Think in advance what you’ll be willing to do to retain accounts. Decide which accounts you’d be willing to do these things for and which you would not.
3. Update your positioning and value messaging to show how you can save your customers money.
ProfitWell monitors a metric they call “willingness to pay.” It measures how much more or less customers are willing to pay for various kinds of value messaging.
Last year, ProfitWell found their clients’ customers were willing to pay a 20% premium for services that would help them make more money.
Now their clients’ customers won’t pay any premium for growth. Their focus has turned toward saving money instead.
If your messaging still focuses on helping your customers make money, it’s more likely to fall on deaf ears today.
4. Rethink which industries and accounts you’re going to pursue and how you’re going to do it.
Some industries are clearly strong and others are much weaker. Currently strong:
- Learning and development
- Remote working technologies
- Remote fitness
The travel and hospitality industries are obviously weak.
5. Do what you can to ‘control the lead.’
If you’re trying to win new business, refine a strategy called “controlling the lead.” This means taking the prospect out of the market for buying a product that competes with yours. You do it so you can capture their downstream revenue flows.
To do this, consider taking on new customers at temporary discounts or suspended fees. Tell them they’ll get free months if they sign on now.
Your goal is to get them to go with you until they can pay your normal pricing. Make them unavailable to your competitors.
One provider of hotel-management systems offers their struggling prospects 6 months of free software use.
Others might offer a 90-day free trial.
You might consider offer a “faux free trial” with no expiration date.
Under this arrangement, the customer can use the system at no charge as long as they stay below certain usage thresholds.
They start paying when their monthly usage exceeds the threshold. As long as they stay below, you reset the activity meter to zero at the end of each month.
Some subscription companies offer buyouts that cover the duration of a prospect’s contract with the incumbent provider.
These and other forms of discounting may be worth considering, provided your cash flow is strong enough.
6. Develop a strategy to offer add-ons and upgrades.
Beyond retaining your current customers, how will you offer added value so you can get more money out of them?
Might you offer more consulting services? Or an added tier of product support?
7. Review your pricing strategy.
If your current pricing strategy works fine now, double down on it.
But if you’ve been thinking about changing it, now’s a good time to move in that direction.
Consider a value-based pricing model because it’s the most resilient of your alternatives.
How does it work? The goal is to base your pricing on the amount of value your customers get from your system.
This structure offers the advantage of enabling you to generate increasing amounts of revenue without having to announce price increases.
Understand the challenges of product-differentiation pricing
Many SaaS companies charge by feature differentiation. Under this model, customers pay more to license added features or functions.
One weakness is that this pricing model encourages frugal customers to look for features they can cut to save money. They may cut features to a point where your software is less useful to them. Then they don’t want it at all.
Consider value-metric pricing
Value-metric pricing avoids these problems. And churn rate for value-metric pricing is half that of feature-differentiation pricing.
But it may be tricky to find the right value metrics. They may vary from one industry or application to the next.
What about user-based value metrics?
Many SaaS companies base their value metrics on the number of users. But that also comes with challenges.
Not every user gets the same value from any piece of software. And you don’t want to create disincentives for many people to use your product. It’s better to have a lot of users because they can make your application stickier.
At times it may be hard to monitor the number of users who have access to a system, and it can be administratively challenging to reset pricing as users come and go.
Identify the right value metrics for your pricing
Here’s a good way to approach value metrics.
Ask yourself: What would be the perfect value metric for both your business and your customer’s business? In other words, what metric would be amazing if you could make it work?
Then if you can’t make that best idea work, what are the 10 next-best proxies for it?
Depending on your industry or your application, you might charge by any of these:
- Number of pageviews
- Number of contacts, files stored
- Amount of storage space used
- Number of full users, viewers, active collaborators, etc.
- Number of videos viewed
Or also many others.
Once you’ve got your list of 10 alternatives, start modeling how each would affect your revenue growth.
Plan enough time for your company to implement the changes
Whatever new pricing you may choose, allow plenty of time to get it approved and implemented.
The average time companies need to implement a new pricing model is 3 years.
During that time you can expect plenty of political and financial battles.
Someone in your company must also ensure that your technologies, processes, people, and systems can support the changes you propose.
The change is likely to be even harder in bigger companies and ones with publicly traded stock.
When it’s hard to grow revenue by acquiring new accounts, think of ways to retain your current customers. And also to grow the amount of revenue you generate through them.
To keep customers who may otherwise leave you, it may make sense to offer temporary discounts–provided your cash flow allows.
To acquire new customers who are under contract with an incumbent competitor, consider buying out their contract. You might do so by offering them a free ride until their old contract expires.
But if you offer such discounts, you must think how and when you’ll regain any money you forego now. You don’t want to lock yourself into a lower price indefinitely.
So don’t let discounted prices become your new setpoint. That would erode both your margins and your customer’s perception of the value you provide.
So be sure your customers understand how and when your prices will revert.
To avoid challenges related to discounts and free trials, consider moving toward pricing based on value metrics.
Think hard about pricing structures you haven’t seriously considered before now.
And also think how you’ll profitably deliver more value for the higher prices you plan to charge.
“Sailing in Stormy Waters: B2B Monetization for Uncertain Times.” Andy Burden. Patrick Campbell. Revenue Collective public webinar. April 28, 2020.
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