Strategies for recurring revenue expansion

SaaS startups should aim for the recurring revenue they earn from each customer to grow over time. This is one of the critical responsibilities of your customer success function. Some startups have a hands-off approach to renewals, whereas others choose to be more hands-on. This dramatically impacts the mechanisms available to you for driving recurring revenue growth.

A hands-on strategy is one where your team is individually engaged in the renewal process for each customer. This works best for more expensive and specialised products (i.e., startups earning a lot of money from a relatively small customer base). Because each standalone customer is highly valuable, these startups can afford to manually handle each renewal, which may only come about once a year and could result in a notable recurring revenue uplift.

For these startups:

• Customers often commit to an annual or multi-year contract when they signup. Payments may be collected annually, monthly, quarterly, or on another schedule. A salesperson is likely to guide the purchase process.
• Before each contract renewal, a customer success agent facilitates the renegotiation of the contract with the customer. The customer success agent aims to both retain the customer and increase the price they pay for the product.
• These contract renegotiations allow customer success agents to upsell additional features to each customer.

In contrast, a hands-off strategy is one where the renewal process for each subscription is automated. This works best for more affordable products that target a broad market. Because these startups have many customers who don’t individually contribute much towards total ARR, these startups can’t afford to manually handle each renewal, which is often on a monthly cadence.

For these startups:

• Customers likely subscribed to a monthly plan through a self-service signup flow.
• Any discounts are coupons or limited-time marketing promotions.
• Renewals happen automatically each month.
• Upselling is done through low-touch marketing efforts.

While it seems intuitive to say that self-service (i.e., bottom-up or product-led) SaaS products should have a hands-off approach to renewals, this is not always the case. Many self-service SaaS products succeed by removing the barriers to initial product adoption while still taking a hands-on approach to sales and renewals. Essentially, the self-service experience gets your foot in the door while the real money is made through a more traditional sales process that follows. This is why I think the price point is the defining factor rather than the sales/service model.

Regardless of whether your startup employs a hands-on or hands-off approach, these are the critical things to consider for revenue expansion:

• Pricing is the most essential foundation for a revenue expansion strategy. Make sure you address this first.
• Upselling of features. Because the SaaS model ensures an ongoing relationship between software vendors and customers, these startups are well-positioned to upsell new features and products to their existing customers. Some startups do this during one-on-one negotiations, while others depend exclusively on one-to-many marketing strategies.
• Reduce discounts over time. Discounts and offers should ideally expire automatically. It’s better to offer customers a 20% discount for six months than a 10% discount for twelve because the former will expire before the contract renews. Otherwise, you will need to factor discount reduction into your negotiations with each customer.
• Increase base prices roughly every year. This will keep your prices in line with inflation and the improved functionality of your core product. Some startups do this during one-on-one negotiations, while others communicate price changes via one-to-many means. Note that increasing pricing regularly in small amounts is much easier than irregularly by more significant amounts.

Ultimately, delivering new value is the best way to grow revenue from existing customers. As their needs grow, so should the value you bring to the table. This is why many SaaS companies move up the market over time, gradually targeting bigger and bigger businesses. Because your existing customers are growing and their needs are expanding, your customers will pull your product in that direction. This not only ensures that you can retain your customers and charge more for your product, but it also enables you to sell to more sophisticated prospects.