Among the many lessons we took away from Software-as-a-Service expert David Skok, the most resonant ones centered around the topic of churn. For a subscription-based business, churn – the rate at which customers stop subscribing to your product or service and stop being customers – is absolutely critical. Most advice pieces on churn revolve around reducing it, keeping customers happy and around. This time, we’re going to flip the script and focus on a different aspect of churn:
Read on to learn about more about negative churn, why it’s a good thing and how SaaS companies can get negative churn by expanding their revenue.
What is negative churn?
It sounds counterintuitive, but negative churn is actually a great thing, a highly desired state-of-the-world that SaaS startups try to achieve. Negative churn occurs when your existing customer base spends more on your products or services this month than they did last month. A good way to think about negative churn is with this formula:
Negative Churn (Monthly Recurring Revenue) = [New Customers (New MRR) + Existing Customers (Expansion MRR)] – Churned Customers (Lost MRR)
Here it is important to consider two different metrics; customer churn and revenue churn. Customer churn is the number of actual customers you lost, whereas revenue churn refers to the amount of revenue contribution that was lost by customers who churn. If you have 100 customers and 10 of them churn, that’s a customer churn rate of 10%. But let’s say those 100 customers contributed a million dollars in revenue, and the 10 churned customers were also your smallest customers, collectively contributing only $500,000 in revenue. That puts your revenue churn rate at “only” 5%.
For the purposes of this discussion, we will be focusing only on revenue churn. Therefore, the flipside of revenue churn is having a negative revenue churn rate, at which point your existing customer base has a larger revenue contribution than they did in the previous time period. But just how can you get your current customers to pay you more money today than yesterday?
With expansion revenue!
What is expansion revenue, and where can I get some?
Expansion revenue is exactly what it’s called – expanding the revenue you’re currently getting from your current customers and your current product. A good way to think about expansion revenue is that it should theoretically be easier to get more money from an existing customer who is already happy and using your product, than it is to get revenue from a prospective customer who’s only just heard of you not long ago.
So just how specifically can you find sources of expansion revenue?
Start with your pricing model. From your product’s inception, you should design a pricing model that has a variable axis. This means that pricing depends on the customer’s size and usage, such as paying for the number of seats they need, the number of licenses they use or the amount of data they require. A good example is Dropbox, which charges companies based on how much storage data they need. This way, as customers use more – or need to use more – of your product, they will have no recourse but to pay more for it. The reason this works so well is that once a company uses your product, decides they like and want more of it, they are already committed; paying a bit more to use more won’t be a tough sell.
Create upsell opportunities. If you have more highly featured – and more expensive – versions of your product, you have a great deal of upsell opportunity. Consider this akin to giving customers a teaser, a taste of what is to come before they can sample the whole meal. People by nature want what they can’t have, so saying that customers have to pay more for certain enhanced features is a good way to entice them into a great upsell opportunity.
Get them in the door, and then cross-sell. Customers might not know the full breadth of your company’s offerings. They might have converted into customers based on the strength of one of your solutions that solves one of their specific pain points. They might not even have realized that you have other products that they might be interested in; now that they are customers, feel free to educate them on your other offerings.
Expansion revenue doesn’t necessarily have to come in the form of subscription revenue either, like the aforementioned sources. For instance, some companies might offer an exclusive report personally hand-crafted for the customer; we here at InsightSquared offer extensive training and advisory services, in our product and sales analytics in general.
It’s also a good idea to separate your reps doing your initial selling from the ones tasked with expanding revenue. After all, both functions require totally different skills, and asking your sales reps to not just sell but also upsell and cross-sell could see them lose focus on their primary responsibility. Instead, hire a team of account managers to make sure your current customers are happy, and offer them more products, services and features.
When executed correctly, expansion revenue can be a tremendously high-margin and low-cost option, with significant impact on a company’s churn rate and bottom line. Focus not only on reducing your churn rate, but on figuring out how you can create a negative churn rate through expansion revenue, and you will see your SaaS company achieve greater success.