This post is by Joel York from Chaotic Flow by Joel York
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SaaS growth isn’t a goal; it’s an obsession. The good news is that SaaS growth can be very smooth and predictable, because of the SaaS recurring revenue subscription model. The bad news is that SaaS growth can also be predictably slow the bigger you get. After a few years of rapid SaaS startup growth, it’s easy to find yourself on the short end of the hockey stick if you don’t know the right levers to push.
The Three Levers to Break Through the SaaS Growth Ceiling
At any given time, you can calculate the SaaS growth ceiling for your SaaS business with a simple formula: customer acquisition rate divided by percentage churn rate. For example, if you acquire 200 new customers each year and your percentage annual churn rate is 20%, then at 1,000 customers ( 200 / 20% ) your growth will slow to zero, because customer churn will equal new customer acquisition of 200 customers per year. New customers come in the front door, while old customers leave out the back. Moreover, you will begin to hit the SaaS growth ceiling in exactly one average customer lifetime of 5 years, equal to 1 divided by your 20% churn rate. Finally, your SaaS growth revenue ceiling will equal 1,000 customers times your average customer subscription, e.g., $10M per year for an average subscription of $10,000 in annual recurring revenue. Without a fundamental change to your business, that’s all the SaaS growth you get.
This SaaS growth ceiling depicted in this example is calculated generally by the following basic formulas from the SaaS metrics series.
max SaaS company # customers = acquisition rate ÷ % churn rate
max SaaS company revenue = acquisition rate x average subscription value ÷ % churn rate
max SaaS company revenue = acquisition rate x average customer lifetime value
This last formula highlights two of the three fundamental SaaS growth levers: acquire customers faster and increase customer lifetime value. If you double your customer acquisition rate, the SaaS growth ceiling doubles with it. Double customer lifetime value by doubling average subscription value or halving your churn rate and again the SaaS growth ceiling doubles.
In the end, however, churn always wins. Churn scales with the size of your customer base. Churn is negatively viral and can only be countered completely by a positively viral growth lever: network effects. Adding more sales reps and increasing your marketing spend are not enough. These strategies may increase your acquisition rate, but to outpace churn you must increase your acquisition rate again and again and again.
The SaaS Growth Levers Follow the Customer Lifecycle
The three fundamental SaaS growth levers: customer acquisition rate, customer lifetime value and viral customer network effects arise naturally and sequentially as a SaaS business matures. You have to acquire a few customers before lifetime value becomes important, and you have to acquire and nurture many loyal customers before network effects kick it. As your SaaS business evolves, you may find yourself cycling through each lever as your highest potential source of SaaS growth.
The three levers of SaaS growth also map nicely to the individual SaaS customer lifecycle as it evolves from initial purchase to deeper use of your product to advocacy within your customer community. Each stage of the SaaS customer lifecycle offers unique opportunities to drive SaaS growth.
The three levers of SaaS growth: customer acquisition, lifetime value and network effects
map to the SaaS customer lifecycle and each stage of the SaaS customer lifecycle
offers unique opportunities to drive SaaS growth.
The diagram above visualizes the deep relationship between the three fundamental levers of SaaS growth and the SaaS customer lifecycle. When read from left to right and bottom to top, each block of this SaaS growth pyramid highlights a proven strategy for SaaS growth that is directly linked to the SaaS customer lifecycle, beginning with driving prospects through the purchase funnel to saving customers that could churn and upselling those that don’t to nurturing a customer community that fosters advocates of your service and drives viral growth.
This is the first post in a series that explores strategies and tactics for driving SaaS growth. Having introduced the three fundamental levers of SaaS growth and their direct relationship to the SaaS customer lifecycle in this article, future posts will focus on each of the ten proven strategies for driving SaaS growth in the SaaS growth pyramid above with real-world advice on how to put each strategy into action. Stay tuned!
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