We'll cover:
- expansion revenue and pricing tiers
- Average Revenue Per Customer (ARPC), not Lifetime Value (LTV)
- The impact of raising your prices
- How to raise prices
Why build companies? Freedom, purpose, and relationships.
Expansion Revenue
Everybody wants recurring revenue because it's the business cheatcode.
[The Automatic Customer: creating a subscription business in any industry] is about how to get recurring revenue in a non-SaaS business. We get it for free in SaaS.
Expansion revenue is the cheat code for SaaS. It's an opportunity for a customer to pay you more money as they get more value from your product. This is how you can get net negative churn.
Charge more to the right customer segments. SquadCast has customers that are just hobbiests, business podcasts, and Gimlet media. What features differentiate these customer types? What does Gimlet media care about that a D&D podcast doesn't?
You can segment on:
- a value metric, like the number of emails sent, number of users, or number of podcasts recorded. Segmenting on users is the best but only if two users log in and see different things.
- feature gating, like a particular integration
- both! Mailchimp, Zapier, SalesForce, and Intercom use both value metrics and feature gating for expansion revenue, but
Zapier has a dauntingly complicated pricing page.
Average Revenue Per Customer (ARPC), not Lifetime Value (LTV)
What's the problem with looking at LTV instead of ARPC? Check out these examples:
LTV = ARPC / churn = $50 / 0.05 = $1,000
But what if you're really sticky and your churn is only 1%?
LTV = ARPC / churn = $50 / 0.01 = $5,000
You may be tempted to think you can spend $4k to acquire a customer
In VC, spend no more than 12 months of a customer's revenue to acquire them. When bootstrapping, limit that to 3-4 months.
B2B SaaS marketing techniques from Traction:
- SEO
- cold calling
- display ads
- viral marketing
- cold email
- affiliates
- adwords
- offline events
- facebook ads
- PR
- joint ventures
- offline ads
- business development
- content marketing
- integration marketing
- email marketing
- guest posting
- engineering as marketing
The impact of raising your prices
Raising your prices has an obvious first-order effect of raising your revenue, but there's a second order effect of your higher-paying customers churning less.
https://twitter.com/robwalling/status/1437197289089482757
https://twitter.com/robwalling/status/1366485199865880576
https://twitter.com/robwalling/status/1366485825093996544
Segment churn by pricing tier and you'll likely see that higher paying customers churn less.
The tinyseed company Gather needed two sales calls to close a $30/month plan. Rob advised them to raise their prices to $39 and $99. There was no increased churn or conversions, so they raised them again to $99 and $159. They're now at $165 and $290 for exactly the same plans. Gather now has customers paying more that churn less.
To effectively raise prices you can decrease the value of a specific plan.
How to raise prices
If you want to treat raising prices as an experiment, treat it like an experiment! Make it super easy to roll back. In a perfect world you could split test pricing but this is tricky to do. Zapier forked pricing per account and only showed you prices post-signup.
If you're definitely going to raise prices, make it a marketable event. Advertise that prices are going up soon and you could sign up now to get the lower rate!
Grandfathering
In a perfect world, you upgrade everyone to the higher price. SaaS is a little different because there's a sort of contract.
You might want to grandfather because raising prices can hurt churn, can raise your support burden (of people complaining?), and in extreme cases it can damage your reputation.
Rob's Rule is that if raising prices on existing customers will not grow MRR by at least 10%, it's probably not worth the headache of communicating.
Never offer lifetime deals, especially not on grandfathering.
Enterprise customers expect annual increases of 5-10%.
Jordan Gal raised the prices for everyone on CartHook with no grandfathering. It made the business amazing and was tricky to communicate.
Structure your message by 1) setting the stage ("we're CartHook and we're changing our pricing"), 2) giving a high-level justification ("we're tons more valuable than when we started"), 3) more specifics about who it impacts, 4) more justifications, and 5) reach out with questions.
Check out how CartHook wrote their price raising email.
