Can you really eliminate churn all together in your SaaS company? No – but you sure can set yourself up for success.
Ever wondered how is it that one SaaS company can have a high churn rate and another a negative net churn rate?
The answer is found in the alignment of three key things:
Think about it, does your SaaS company have high-velocity sales teams selling smaller deals with the expectation that you’ll get huge annual expansions? Or are your sales teams working at a slower velocity and looking for a lot larger deals where you’re getting the lions-share of the total possible cash out of every deal up-front with little possibility for expansion?
This sales velocity decision is inextricably connected to a pricing decision. Are you trying to maximize revenue and always negotiating for the highest price possible in each sale?
On the flip side, are you going with a low-price in an effort to grab market share, minimizing any friction a buyer might have and setting you up to grow quickly?
Expanding into accounts is the antidote to churn. But if clear communication about account expansion isn’t communicated from the beginning by your sales team and taken into consideration in pricing – you’ll find it more challenging than ever.
Generally SaaS companies have three key ways to expand into an account once they’ve got them started on using the service:
Gradually increasing account sizes as a customer makes greater use – if your product lends itself to growing with the customer – can keep churn low. Accounts feel like they’re only paying for what they use and expansion is very clear and contingent on the decisions they’re in control of. Problems occur with usage when sales teams aren’t aligned and are chasing bigger deals or trying to sell an entire organization worth of seats in the initial sale.
Adding additional products is commonly know as cross-selling. You’ll see companies like Hubspot do this by having a CRM, a Marketing Hub, a Sales Hub, a Service Hub and a CMS. Typically smaller SaaS companies offer one product, so this type of expansion is reserved for larger, later stage companies. In this case, a misaligned sales team that is focused on high-velocity may try to close sales without ever introducing the additional product offerings. This doesn’t bode well when clients return wanting to expand and are confronted with a new buying decision and separate price tag that they weren’t anticipating.
Lastly, there is feature expansion – also known as up-selling. Many SaaS companies find themselves pricing in tiers with certain features only available upon upgrade. There are a couple of tricky pieces to successfully expanding with features. First, it can be tough to figure out where to draw the lines between tiers and what features will entice accounts to upgrade. Another issue is that there are limited opportunities for accounts to upgrade because there are only so many tiers.
Many SaaS companies are starting to combine expansion strategies. If you use the 3 part tariff pricing strategy, it’s easy to see how feature expansion maps to the platform fee and usage expansion maps to the marginal cost fee.
Basically, you’ll be setting yourself up for success by getting your sales and pricing aligned and having sale people over communicate and be completely transparent about what future expansion on your platform will look like. By working hard to eliminate objections over sales methodologies, pricing and expansion – the only reason left for an account to churn at is if they’re unsatisfied with the performance of the actual software.
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