How might we become more SaaS?
Happy #2021 everyone!
This year we’re starting a Q&A series where we’ll answer your questions via posts and videos. Ask us anything and we’ll tell you how we might approach the opportunity from a monetization angle or how we’ve approached a similar opportunity in the past. Here’s a question that we received last week from a professional services firm:
How might we transform our revenue model to become more SaaS-like? We plan to grow our customer base from 1K to 5K in the next three years. How might we set up a SaaS like pricing strategy to achieve that kind of growth?
This is a question we get a few times a week. Fee for service businesses are fast transforming into recurring revenue models and the opportunities are absolutely fascinating.
Customers: From 1K customers to 5K, by YE 2024
$Revenue: From $15M to $30M, by YE 2024
Revenue model: Fee for service - $/hour
Segments: Small, medium, large businesses
Here’s how their segmented average revenue per account - ARPA, looks like today*:
*Revised figures to keep anonymity
New customer acquisition can be a rewarding strategy and it's the first one that comes to mind when product owners think about growth. But acquisition without mobilization might cause you to leave money on the table. Because increasing the lifetime value of your customers can drive growth significantly faster than new customer acquisition.
If you have a good mobilization strategy, you might not need as many customers to drive the desired growth. Pricing is the lever to trigger the inter-segment mobilization that you need.
Here’s one path among others:
- Acquire: Create a new Level 1 loss leader at $99/mo
- Re-configure Level 2 to deliver ARPA from $1,200 to $999/mo
>> Mobilize X% Level 1 customers to Level 2 in Y1
- Re-configure and create a NEW segment to deliver ARPA from $1,200 to $1,999/mo
>> Mobilize Y% Level 2 customers to Level 3 in Y1
- Preserve and fence existing customers from downward mobilization.
>> Mobilize Z% Level 3 customers to Level 4 in Y1-Y3
You can grow customers from 1K to 5K, but you can drive revenue faster by acquiring different types of customers and mobilizing them to higher value segments. Here’s a path to achieve $40M in YE 2023 with 3,000 customers and $62M in YE 2024 with 4,000 customers. Below is what the revenue distribution might look like after.
As you can see from this example, you will have diversified your acquisition strategy from one to four levers:
1. Attract and acquire a new and lower-value customer type
2. Implement new caps to increase the value of Level 1 and Level 2 customers
3. Create a new value level. Implement triggers to focus growth in NEW Segment 3.
4. Preserve the customers and the value delivered at the highest-value segment and prevent downward mobilization from Level 4.
And this exemplified path is ONLY one of more than 20 possible growth paths that might come into play. New customer acquisition is not the only path to growth. And all acquisition strategies are NOT created equal.
Now, just because you shuffled your segments doesn't mean that your customers will adopt your offerings in this new way. You can utilize a market simulation to determine with precision which customer types will adopt which plan at what price points and set the right mobilization triggers accordingly.
Becoming more SaaS like in your revenue model will require various SaaS like transformations in your BizOps, MarketingOps, SalesOps, and FinanceOps as well. You will need a series of new customer experiences, including and not limited to a new purchasing experience, new CPQ tools, and a series of new CSM experiences.
We can help with all that. As always, please reach out to explore.
DM your questions to us and we’ll ping you when we post your answer.