Pricing & Revenue

Why Tilting Just a Smidge from Self-Service Can Grow Your Revenue 30x'

Jason Lemkin

Recently I’ve been fortunate enough to meet with a number of outstanding entrepreneurs building self-service SaaS business at the bottom of the market.  A customer base made up of Very Small Businesses and individual business purchasers in slightly larger companies.   By all means, if you can build a $100m self-service SaaS business without the need for a sales team, a client success team, webinars, getting on planes, and all that — go for it.  One con is that these businesses often are tougher to gain a longer-term competitive advantage in unless there is a network effect (e.g., DropBox).  And competition thus ends up being even fiercer.  But from a business model perspective, why invest in sales, demand gen, and all that if you don’t have to?   Why not just build a wonderful product and let them all sign up on their own?

Let me just share one semi-obvious piece of math and learning.  No matter how hard I tried at EchoSign to drive up self-service as a % of our revenue, the laws of this math and gravity held it back to a minority of our revenue.  Just as it is at Box and Yammer and many others as well that started as simple self-service models.

Here’s the thing.  If your product is 100% individual-focused, and you add just enough features to sell to a Team, to tilt just slightly upmarket — you can grow your revenue, at least a segment of your revenue, by 20-30x.

Screen Shot 2013-08-24 at 2.55.51 PMWhy?  The key is a combination of (x) churn and (y) value.  Virtually every self-service, individual seat web service churns at a relatively high rate — from maybe 2.5% a month at best, to 3.5% or 4.0% a month or more in many cases.  (There are exceptions.)  So that means maybe your customer lasts 8-10 months, maybe a bit longer but not too much.

Now, come up with a slight extension of that same product, wherein some group, team or segment of an entire enterprise can use it together.  Let’s call it just 5 seats to start, instead of 1.  Maybe you add management-level analytics.  Some sort of collaboration.  I’m not sure what it will be for you.  But let’s call it the most basic features necessary so a team or a group will buy, instead of an individual user.

And what you’ll find is epic on the churn side.  Your churn as the deal gets just a smidge bigger will fall dramatically, toward 1-1.5%.  And as you add more seats, the churn will trend toward 0% and eventually become negative.  Because your customers will add more seats over time than they cancel.

Now, since SaaS compounds, and is a long-term play, over 3+ years, you’ll be just so far ahead.  Because that single-seat user that left after 8 months may be gone forever.  But that 5-seat Team edition sale customer … is still there in Year 2 and Year 3, paying you.   And maybe even adding seats.

All of a sudden, in say a $30/month product … you’ve gone from a $240 Customer Lifetime Value for the single seat purchase to $5400 CLTV over 3 years from the same customer, from the same basic core product, just with whatever additional functionality you need for your Team or “Enterprise” edition.  And the math just gets better as you support slightly larger teams.  That’s truly epic.

So what’s my point?  I’m not saying that if you are building a freemium or self-service product you should immediately Go Enterprise.  Although I’ve done that, that exact path.

What I am suggesting at least thinking about is adding a layer.  If the one-seat freemium thing is working for you, add a Team edition, or a so-called “Enterprise” Edition.  Even if it’s just for an Enterprise of Five.  And hire a sales rep or better yet two to actually talk to these customers and try to close them — go beyond just customer support.

Because if it works, just that little extra functionality for that extra edition — you can dramatically increase your growth rate.  Because all of a sudden, that same customer, that same lead, that same person who came by your website or app … all of a sudden is worth 20-30x more.  Same effort to get them to your site or app.  But 20-30x the return.

Published on August 26, 2013
  • Niel Robertson

    A good point that should be considered by most SaaS companies. Have you done a similar CAC analysis when you add sales folks, customer support requirements for larger teams, etc.. though? I’m not sure always that the UE works out over time and what the working capital requirements are for CAC payback. Probably depends a lot on the product and the team the enterprise is inside of. Every SaaS product tends to have its own physics from my limited exposure to a few.

    • jasonlkn

      It definitely may not always work out ..

      but …

      If you have a $2500+ ACV or certainly a $3500+ ACV … you can generally make a web-lead-to-inside-sales model work.

  • Geoff Cramer

    How do you come up with 3% monthly churn = 8 month customer lifetime?

    • jasonlkn

      Fair enough … I’m making certain implicit assumptions around growth rates inherit in that. I extend the ranges a bit, and you could push it out further. Whatever your Customer Lifetime Months are … they’ll likely be shortest from single seat customers in most cases …

      • Geoff Cramer

        Oh, I totally agree with the premise of the post – I just was curious about how the math worked… most other sources I can find say you find average customer lifetime by doing 1/churn, which would give a 3% churn rate a 33 month lifetime, which is far different than 8 months.

        BTW, have been an avid reader since you launched – and as the founder of a hybrid SaaS/Services company there hasn’t been another blog/resource on the web that’s been more helpful – Thank you!

      • Rodrigo Fuentes (@rodrigofuentes7)

        I had the same confusion as @GeoffCramer. In another post (“Two SaaS Metrics That Actually Don’t Matter That Much…”) you said LTV = 1/churn. What implicit assumptions around growth rates were you making? Very curious to learn more.

  • jasonlkn

    Also, the other thing you’ll find as you scale is Credit Card Churn becomes a material issue. The credit card expires and the customer automatically unsubscribes … it’s a sub-issue but a real and interesting one.

    • Paras Chopra

      Interesting. We face the credit card churn as well. Do you have any suggestions on how to contain it?

      • jasonlkn

        A basic best practice for billing in general: notice customer 60-days ahead of time (in app), 30-days ahead of time (in app and by email), again 2 days ahead of expriation … and then allow expire with big red Expired notice in app.

        Bear in mind, though, if you do this to customers who are unlikely to renew, you’ll incent an earlier-than-planned cancellation in many cases …

  • Mikita Mikado

    Jason, seems like some SaaS companies may face chicken-and-egg problem. Their ACV values might be smaller with the bottom-of-the-market clients, which means they shouldn’t hire a sales team. At the same, you say that the ACV may go up x10 times if you move up in the market…

    What is a cheap and safe way to test if it makes sense to hire sales people?

    • jasonlkn

      It’s really not that expensive to hire 1-2 sales reps.

      First, remember they work on upside. Typically 50% base / 50% commission. So if they don’t sell, they don’t kill the bank account.

      Also remember salary vests. So even a $120k salary / 12 months is “only” $10k a month 😉

      Beyond that, the way to test it if you really don’t even want to hire one single rep is just to do it yourself first … close 2-3 customers yourself of just enough ACV to justify a rep … then hire someone to do it for real …

      • mikitaquoteroller

        Yeah, we’ve done it ourselves, got around 10 sales. Time to hire people…

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