Are You Acquiring the Right Customers?

A recent blog post I published outlined seven requirements for successful up-selling. Based on the sources in that blog, SaaS providers who are successful at up-selling have lower selling costs for those up-sells and higher growth rates. Intuitively up-sells are easier sales because they are to existing customers and therefore less expensive and can help accelerate growth and this is also supported by facts.

In this blog I’ll cover the first requirement, that you acquire the right customers. On one hand, it would seem like any customer that buys your product is a good customer to have but that isn’t always the case.First let’s talk about some of the different kinds of up-selling that may occur and some of the different business models and what the “right customer” means in each of these contexts.

Usage Based Pricing Metrics

Sometimes SaaS products are based on usage. It may be a certain type of transaction or a resource as part of the service such as storage. In this case the desired action is to increase the number of transactions or to increase the amount of the resource used. To be successful you need to have customers who have the business growth to require more transactions or the business growth or application usage growth to require more of the specific resource.

For example, if your service is a service provided for an M & A transaction and it is based on the amount of document storage you want to sell the service to a customer that is in the business of doing a lot of M & A transactions, either as a service provider or an acquisitively oriented company. Selling to the customer with 1 or 2 M&A transactions won’t be a good long term customer with up-sell opportunity.

User Based Pricing Metrics

This use case is when the revenue is based on the number of users of your service, a very common business model in SaaS.

If you are selling a project management tool where billing is based on the number of users of the system you want to have a customer that has a lot of people working on projects. If you have an HR system you’d rather sell to a company that provides outsource Human Resources (HR) services as opposed to a company that only has 1 HR person in the company.

Both of the above cases are straightforward and basically you want to be selling to the market segment that your product was designed for. In addition to the loss of up-selling opportunities selling outside of your planned market segment can also result in increased support costs and management time to keep the customer happy.

Functionality Based Pricing Metrics

This is also a common SaaS pricing strategy sometimes with a set of standard features with associated with unique tiers possibly being Single User, Small Business, Corporate & Enterprise. If you acquire customers that don’t ever have a requirement for the additional features then you won’t have an up-sell opporunity. Sometimes this approach is combined with a per user pricing metric and in this case you need to make sure that there are users at the customer who likely will need your more advanced features. Sometimes the additional functionality is a seperate module that can be added and the same requirement applies.

For example, if you are selling an HR system and have various levels of functionality or additional modules of functionality you want a potential customer who has broad needs that fit with your product functionality such as recruiting and talent management, not just basid HR functionality.

Revenue Sharing Pricing Metrics

This model is a model that is not as common but is used by some SaaS businesses and when well executed can be a very good model. The way that Force.com is sold to ISVs by Salesforce is a revenue sharing model. In this case Salesforce invests up front by providing computing resources for development and training. The amount billed by Salesforce is based on a percentage of the ISV’s revenue. So essentially Salesforce’s upsell potential is determined largely by whether the ISV that uses Force.com is successful. This then becomes almost a software investment kind of decision.

In other revenue sharing models the provider is essentially betting on the growth of their customer to provide up-selling opportunities. The beauty is that the upsell revenue just kind of happens in good circumstances and does not require any sort of transaction. The bad news is that a company may not grow either because of that company’s strategy and execution or because of industry and larger economic trends. This type of model can work very well where the SaaS provider actually has substantial ability to influence their customer’s success. In the case of Salesforce the marketing power of the Salesforce Marketplace can have substantial influence on their ISV customer’s sales.

One other substantial piece is the financial health of a customer. Having a customer who is borderline insolvent obviously isn’t a good plan.

Selling into the customer segment that the product was defined for makes sense, but you also have to be careful that you don’t bypass genuine new customer segments for your product. This evaluation, opportunity versus deadend, needs to be managed otherwise you can end up with a substantial amount of customers where the revenue from them won’t grow.

To get the right customer:

  • Evaluate opportunities closely that are outside the customer segments the product was designed for
  • Sell to potential customers that are growing
  • Sell to potential customers that are likely to be solvent in the long term
  • Sell to potential customers who you believe will have a need for most or all of your product functionality at some point
  • For revenue sharing models evaluate the business opportunity your potential customer has and their ability to execute against their strategy

If you follow the above guidelines you’ll have a much better chance of having a portfolio of customers with successful up-selling opportunities. Your marketing influences whether the right sales leads are occuring. Your customer acquisition process and sales incentives, if applicable, will help influence whether you are closing the right opportunities. Remember that “any customer” may not necessarily be better than no customer and it’s better to think about that ahead of time.

Paul

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