Making your SaaS Capital-efficient again ?? DBNRR levers ?? inside

Hey folks!? While there are some revival signals in SaaS (think: Klaviyo IPO I wrote about a couple weeks back ) - this year, if you ask any SaaS marketer, has been exceptionally hard. We're far from putting recession in the rearview mirror. The budgets have been cut, and SaaS companies, rather than splashing out on growth plays - were looking for ways to become more?capital-efficient?again. Look at what's happened at Airtable recently:?

And as TechCrunch stated in their recent article, "Capital efficiency is the new VC filter for startups ".

But also, we have a problem, fellow kids:?

"As cash becomes more expensive, investors are giving more and more attention to resource-focused, shrewd founders who can handle the hard times ahead. In 2023, most VC meetings focus on whether a business can deliver sustainable, efficient growth during the downturn. As far as our anecdotal evidence is concerned, most founders haven’t quite adjusted to the change.

We repeatedly see startups at all stages failing to raise at the same multiples and velocity they used to because, by current standards, they are terribly capital inefficient and may not even be aware of that."

Ouch.? ?

Techcrunch argues we've got Capital Efficiency all wrong

Traditionally, SaaS companies used to evaluate their capital efficiency based on their?LTV:CAC ratio.?

The crack of the issue was - the LTV (lifetime value) was often based on bogus churn data. If you've been in business for 8 months, how do you know your LTV will be 18?

Igor Shaverskyi, partner at?Waveup, argues that the CAC payback period is a more reliable metric: you look at how much it costs you to acquire your customer, and how much they are paying you per annum, on average:?

CAC payback = Average CAC per customer/Average ARR per customer

What is a good one??According to VCs (based on recent benchmarks published by OpenView and Bessemer Venture Partners), it's around a year for an SMB customer:?How to improve your CAC payment period? Good news: you can feed two birds with one scone!?

PLG double-whammy: Reduce CAC and increase Average ARR per customer in one swing?

#1 Decrease your CAC by investing in activation

How much does it cost you to drive a single signup to your product? $500? $1000? My experience with Google Ads tells me this may well be the case.? If you're getting 1,000 trial signups per month (what I used to get when I worked at a small SMB SaaS startup), that's around a million $ worth of leads!?

And yet - again, and again, and again - I see SaaS companies doing absolutely nothing to activate their trial users. I hear that onboarding tools are "too expensive". If you have 1000 trials per month, and the tool costs you $299, then it would cost you < $1 per user to build in-app onboarding experiences to activate them.

Companies that have implemented self-serve onboarding have seen a?10 -75% increase in activation rates within the first month!?Let that sink in. If your users don't activate, they are not going to experience the value of your product, and they're going to leave. That's $500-$1000 flushed down the drain to save $1.? We've written tons on activating trial users - check out this post here. ?Book a quick consultation with us to discuss how you could reduce your CAC by activating more trial users with Userpilot - or try it yourself for free. ?

#2 Drive more revenue from your existing users

Now, we're getting to the finale of today's rant: if you wanna reduce your CAC and improve your Average ARR at the same time, you should sell more to your existing customers.?That's where another coveted SaaS metric comes from: Net Revenue Retention.?

Net Revenue Retention (NRR) is a SaaS metric that calculates the percentage of revenue retained from existing customers over a specific period of time. The holy grail in SaaS is to have an NRR > 100% - meaning you expand the revenue from the existing user base every year.?How to do that??Jason Lemkin will tell you to launch a second core product faster (ideally when you're at around 10 million) and that you can't grow without it. But that's easier said than done. Instead, you can try the following:??

1. Implement usage-based pricing?

Charge per seat. Per number of Monthly Active Users. Per number of emails sent. Surveys launched. Pop-ups seen (outrageously expensive for a high-traffic website!)?As your customers grow, you should be growing with them. Implementing usage-based pricing can literally 10x your revenue from the most successful users:?

2. Module-ar-ize your product?

If you can't launch a new product - think about which product features you could sell as "add-ons" to your existing users?.

3.?Increase your attach rate by cross-selling these modules to your users

As Hubspot put it, your attach rate is simply the revenue from the cross-sell of your secondary products (or modules) divided by the revenue from your primary products:?

Obviously, it's a good predictor of NRR.?How to push more users to buy your add-ons??As usual, the correct answer is "it depends":?To make your cross-sale efforts relevant and successful, you need to detect the right time and context to push the upsell message:?

We covered the whole cross-sell and upsell playbook in this post , but here's the TL;DR:?

1. Understand Upsell Opportunities: Recognize moments in the user journey for introducing higher product versions. Differentiate between upselling (higher version of a product) and cross-selling (complementary products).
2. Segmentation: Segment users based on their customer journey stage and offer relevant upsell opportunities. Use "jobs to be done" to offer tailored premium features. Track product usage and prompt users nearing their limits to upgrade. Target free trial users with upgrade prompts before the trial ends.
3. Target Loyal Customers: Use Net Promoter Score (NPS) to identify loyal customers and offer them contextual upsells.
4. Upselling Best Practices: Use FOMO tactics to highlight the benefits of upgrading. Simplify the upgrade process to reduce friction. Offer limited-time deals and tailor pricing based on user needs. Provide trials of premium features to showcase value.

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Learn about driving sustainable Product Growth from no other than the Father of Growth Hacking himself!?

Sean Ellis is spilling the beans about what sustainable Growth means in 2023 in his upcoming Product Drive talk:? Sign up for this year's edition of Product Drive - only 2 weeks to go!!! 2100+ Product Folks have already signed up - what are you waiting for????

See you all next week!?