SaaS - Land and Expand

In B2B SaaS world, like most other B2B industries, it is quite common knowledge that, to hit your revenue targets, you have to take 2 approaches

1.??????Capture new customer base

2.??????Capture more business from existing customers

A standard and hygiene metric that tracks this in SaaS is the net new revenue

Here,

a)?????New customer revenue = Revenue from all new customer’s won in a time period

b)?????Expansion revenue = Additional new revenue gained from existing customers in a time period

c)??????Churned revenue = Revenue lost because of customer churn in a time period

d)?????Contraction revenue = Revenue lost because of reduction in subscription by existing customers

Depending on the type of market and sales cadence, sooner than later every SaaS company will have to start focusing on improving expansion revenue and reducing churned revenue. One well established strategy to achieve this goal is a planned “land and expand” approach.

As the name suggests, there are two stages in this approach,

Land stage – This is where the company by design will enter a new customer account using a subset of its products to address a very specific/narrow and immediate customer use case usually in a focused department. Usually at this stage the new revenue in the above equation will be low and is not a reflection of the total potential of the account.

Expand stage – Once the company has landed and established its product and service credibility, the company moves into the expand stage, where, in a structured manner the company seeks to gain more user base for its product/offering and contribute to the expansion revenue.

Some well known products who have successfully pulled this off are Slack, Zoom and Atlassian.

The nature of how the land and expand will play out can be very different for a SMB, mid market or enterprise customer base.

Let’s take a little closer look at the various details of how the approach plays out under different circumstances.

Land approach

Acquiring new customers are always challenging, more so if you are a small company with very little brand presence and very few logo accounts. Acquiring new customers is also a function of two important factors

1.??????Commitment from customer (Time, training, price, risk level)

2.??????Number of stakeholders

SMB

Stakeholders - In small businesses, users of our product are also the buyers. These customer types are mostly made of prosumers, agencies and lifestyle businesses.

Sales approach – Here, product does the selling itself. Product should be tightly designed to ensure that the users who sign-up for trial should be able to manage themselves and reach the “aha” moment in the shortest possible time (Ideally within first 30 seconds to 1 minute of the start of the trial).

Conversion time – Anywhere between few minutes/hours to few days

Examples – Canva, MailChimp, SurveyMonkey, Stripe, Shopify, Zenoti

Mid market

Stakeholders - In mid market businesses, the number of stakeholders go one notch up. Here, users are not necessarily the buyers. Apart from buyers and users, there will be an influencer (mostly the IT head). The key to convert these customers are to find the champion and a strong use case.

Sales approach - Product selling here moves from a simple inbound self-serve motion to sales enablement. It might mostly start off similar to a simple self-serve motion where the user/manager will take a quick trial of the product. Beyond this, you will need a sales person (mostly inside sales) to work with the product champion within the buying company to enable the trial, configure and ensure that the landing use case achieves success within a well defined time window.

Conversion time – Anywhere between few days up to 30-45 days

Examples – HubSpot, Marketo, Asana, ZenDesk, Atlassian, Salesforce, Freshworks

Enterprise

Stakeholders - In enterprise businesses, the number of stakeholders go up even further. Usually, apart from the user and the buyer/sponsor, there will most likely be a buying committee with representation from IT, purchase, function head involved.

Selling – Product selling here goes through a series of steps. Again, similar to mid market, it might start off with a simple product discovery/trial by the internal champion, but very similar to mid-market customers, you will need a sales person (inside sales/field sales based on the deal size) to move it to success. There will have to be clear POC metrics, scope and timelines defined where the sales/solutions expert will have to work continuously with the internal champion on one side and also the buyer/sponsor to ensure measurable ROI by end of trial, leading to the final sale.

Conversion time – Anywhere between 60 to 90 days (can go up for high risk products)

Examples – Box, Adobe, Docusign, WorkDay, New Relic, Okta, Druva, Appdynamics

Once we have the new customer sign-up complete, the account now transitions into customer success stage where the focus moves to retention and expansion. This is where the “expand” approach kicks in.

Expand approach

Expand approach, very similar to “land approach” vary between customer types. The importance and the impact of expanding into an existing account will start having pronounced effect on the company’s ARR as it grows.?

Freshworks revenue retention and expansion graph

Observe how the revenue contribution is sloping up for customer cohorts of previous years. Freshworks has net dollar revenue retention of 110% and above

Source: SEC filing

Take a look at the impact of revenue expansion within existing accounts in Freshworks. Each horizontal segment with unique colour represents the cohort of customers who have signed up in a given year. Instead of the revenue contribution from these cohorts remaining either flat or going down (because of churn), we see that over years each customer cohort is increasing its spending with Freshworks. This is a classic “Expand approach” in action.

Revenue expansion within an account can happen in multiple ways depending on the nature of product and the customer type. Some common revenue expansion methods are

So, how does the expand approach look across different customer segments

For SMB, expansion as an approach does not make much sense because of the limited scope of how the product will be used by these customers.

Mid market and Enterprise

In case of both mid market and enterprise customers, there are a few ways to approach this, Product led, Marketing led and Sales led

Product led: Design ‘virality’ elements which will enable existing users to invite other team members, employees to become aware, try and sign-up. Open-source as an approach is also effective to build user trust.

Examples – Zoom, Slack, Notion

Suitable Categories – Mostly collaboration tools and DevOps tools

Marketing led: Design referral campaigns which will incentivize the existing users to invite other team member. Build new product awareness via periodic email newsletters and drip campaigns etc

Examples – Gmail, Dropbox, Superhuman

Suitable Categories –Productivity tools, collaboration tools

Sales led: Deploy account managers who will (using relationship building) periodically seek out new opportunities either to expand the user base of existing product and/or look for opportunities to introduce new products for new use cases

Examples – Snowflakes, Box, Datadog, MongoDB

Suitable Categories – Security, Analytics, Infrastructure

Between mid market and enterprise, the degree of involvement of field sales will vary based on the deal size.

Business Impact

Let’s take a look at the business impact of the land and expand strategy by analysing 3 year performance of 5 top public SaaS companies.

1.?Table shows the revenues of 5 public SaaS companies between 2019 and 2021

2.?S&M = Sales & Marketing(S&M) expenses required to achieve those revenue targets

3. Ratio = (S&M Expenses ?/ Revenue) * 100, it indicates what percentage of revenue is the S&M expense

4. Revenue, Sales & Marketing (S&M) expenses are in USD millions of dollars

5.?DBNRR – Dollar Based Net Revenue Retention/Expansion?

If we notice, across all these 5 companies, while the revenue has been increasing 30% to 300%, S&M expenses as a percentage of revenue is reducing consistently. This clearly indicates the impact of revenue expansion (with in existing accounts) on cost and overall profitability.

Also, while these companies started off with 1 product, they all have expanded their number of product offering innovatively and thoughtfully. This increased product offering is a critical enabler for the organization to seek up-sell opportunities within existing customer accounts.

Conclusion

Though “land and expand” is a well established approach in SaaS, as you could see, understanding the nuances of how it plays out in various circumstances is critical to its execution success and business impact. I hope this write up gave you a quick overview of the key elements of the strategy in a SaaS product context.