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The Path to Exit
22 | Balancing SaaS Growth: Upselling vs. New Customer Acquisition vs. Pricing
00:19:02
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- [00:02]
A
Welcome to the Path to Exit, a podcast to help software and Internet founders understand the process to raise capital or sell their business.
- [00:19]
B
Hello and welcome everyone. I'm Mike Lyon, Founder and managing director of VistaPoint Advisors, and this is the Path to Exit. This show is dedicated to helping founders of software and Internet businesses understand what it takes to raise capital or sell their business and to do it well. My guest today is Mike Greco, managing director of VistaPoint Advisors. Mike has worked in technology M and a for over 10 years and advised countless founders on M and A and capital raising events. In this episode, we'll discuss various vectors for growth and how you should think about allocating resources for upsell customer success versus new customer acquisition. Please enjoy my discussion with Mike. Mike A lot of times when we're talking to founders, everyone's really aware of the need for high growth rates and good net revenue retention. So that tends to be what they focus on, those metrics. But there's obviously a lot of different ways to get at growth. Can you talk about maybe three of the most common ways we see our businesses grow and then we'll dig into the details on balancing those.
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C
You're spot on. And not all growth is created equal on that side and valued the same way. The three main ones I would call out up leveraging your existing customer base to either cross sell or upsell a new product or leverage pricing differences from a packaging perspective. You have new customer acquisition, so just getting a new logo. Or the third is increasing pricing across your existing or new customer base. Those are the three dominant ones. And as I said at the onset, not all created equal.
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B
Absolutely. Maybe talk a little bit about new customer acquisition. What's the pros and cons of pointing your organization in that direction to grow the business if that's your primary vector you're trying to grow through?
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C
Yeah, land grab. Right. If you have more of the customer base that is applicable in your icp, the greater ability you can push out competitors. If you're the dominant force, you create network effects. Those network effects allow more. Call it like the flywheel. You have existing customers talking in associations or at conferences or to their buddies to tell them, hey, we use this solution. Obviously you should. And there's this idea around. If you're the dominant player, obviously more people will use you. That certainly increases. The downside to a lot of that is it can be very costly. There's huge CAC associated with that. Depending on your sales cycles, it could be excruciatingly long as well as marketing expenses. And I would Say if there's something a founder is not necessarily as good at, it would be on the new customer acquisition, sales and marketing side of things. It can be harder for founders to get those new customers.
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B
That's probably the most expensive way to grow, right? Obviously adding a new logo is the most expensive because you have to spend all that money. If you're a bootstrap business though, it may really be your only option. So if you only have one SKU or one product, you can obviously sell to new customers. You can in theory upsell your existing customers by selling more of that same product, but you may not even have a cross sell opportunity. I think it's good to start thinking about when you could have a cross sell opportunity though. Is it adding a different module or something else just to make sure you have the ability to do that.
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C
And honestly, sometimes it's a new product. Right. That's an easy thing to cross sell. You have a product that's adjacent. Hopefully you're listening to your customers. Your customers then tell you where they'd like the product to go next. You build a module or a feature and make it a pricing upsell capability from a new product. But it's also just where you start. If you start with a 1 SKU and it's an all you can eat, there's obviously pain points on trying to upsell that existing customer. And so making sure you're thinking about pricing and packaging earlier on thinking about module. How do we move and evolve with our customer base that's not just product related is also really important because you can only make so many new products and R and D is very expensive.
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B
Absolutely. So we talked about some of the pros and cons of new customer acquisitions, new logos, maybe talk a little bit about that same dynamic for focus on upselling and cross selling. What are the pros, what are the cons to pointing your organization in that strategy?
- [04:13]
C
The pros are if you can capture more wallet share and get deeper into an organization, it's harder for you to get removed from that organization. So you become the customer or the provider of choice again. You listen to your customer, you get closer to them, you build new products that are actually market applicable. That upsell capability is almost natural in nature. Now a lot of founders and early in the life cycle tend to try to use either customer support people to do that or salespeople. And it is a really different type of personality that creates that kind of upsell. And it's a hybrid between those two. So we find the most successful obviously have product evolution that creates that or a modular product that creates it from a pricing and packaging perspective. But making sure that you have the right Persona, selling into that customer base and upselling is really impactful and important. Again, the deeper you are in your customers, the harder it is for you to be replaced. On the con side, there's a natural limitation to what a customer is willing to pay any one vendor or for any one specific solution. You hear this time and time again in the marketplace. Point solution versus platform, depending on where you fall on that spectrum. The closer you are to platform, obviously greater upsell capabilities and more opportunity for it. The more point solution you are. You're really trying to create a whole new system or something to snap in and it creates more challenge. So it tends to be a little bit slower in nature. But the pro is the CAC is substantially lower, right? You already have the customer saying yes to it. You have either contract in place or an MSA to where you can expand and grow that over time. And again, if you can prove it early on that you are capable of providing immense value, they're going to look to you for more things. And so it really is a shorter sale. Also lower. On the CAC side, there are limitations to how much you can push one specific customer.
- [06:13]
B
A lot easier to sell to an existing customer than a new customer. Now you have to have the SKUs or the ability to upsell to do that. But I think that's really important to think about as you're allocating the resources between these two. Let's talk a little bit about the other leg here, which is price increases. Obviously you can drive growth. You can drive your net revenue retention via price increases. One of the things I've seen throughout my career is founder led businesses. When they're sold either to a private equity firm or to a strategic buyer, pretty much every buyer takes price up and it pretty much works every time. So what we tend to see is founders are pretty conservative with these price increases. They don't like losing deals, so they tend to underprice a little bit. Really. There's three basic strategies you can do with price increase. One is just not do it at all. And we see that a lot where there's just never a price increase. I don't think that makes sense certainly in relation to what's happening with other software products, just general inflation. So I think that's one that's commonly followed, but maybe not the best one. The second one would be just don't do any price increases. And then every eight years you do a 30% increase. And then there's the more traditional model that I would say VC backed businesses or public companies follow, which is they just build in these pricing escalators, maybe 2 or 3% a year. They tie it to inflation. However that looks. Can you talk about maybe the trade offs between those two? The big price increase infrequently or the more steady price increase? Do you get credit for that in a different way? How should founders think about trying to balance those two choices?
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C
Our answer revolves mostly around that last point. How much credit are you going to get for it? Yes, if you can double your price overnight, that's great, but there's little elasticity in terms of doing that over a long period of time. So the next question you typically get from a buyer or an investor is how do you win? Are you winning based on price because you're the cheaper of the product, or are you winning on features and functionality the more you're heading towards? Yeah, we're significantly discounted even if you're winning on features, but we're significantly discounted, discounted from the market. That is certainly part of the story, why you're winning customers, particularly on the SMB side. And so making sure you're able to balance those two is just really important. Frankly, if 7 to 10% of your growth is attributable to pure price increases, you're starting to get into a calculus that you're discounting your NRR growth, you're discounting your total revenue growth, but certainly to your earlier point, raising your prices. Founders are normally pretty shocked that people are willing to pay for what they have or what they're providing. So there's this giant reluctancy. But being able to increase prices allows you to have some operating leverage, allows you to invest in some of these other growth channels around new customer acquisition and upsell cross sell. And it's just a good healthy thing to do and something you want to balance, but certainly not get too aggressive on that side.
- [08:55]
B
Yeah, absolutely. And if you do like a 30% price increase one year, obviously your growth rate, all your metrics jump up correspondingly. No one's really going to give you long term credit for that because they don't think you can do a 30% price increase every year, that's just not going to play out. I think if you have small to moderate price increases every year, 2 to 3%, and let's say your net revenue retention was 1, 25 and 3 or 4% of that was price increase, I think you actually would get credit for that as long as you had done it over a sustainable period of time. But big moves at the very end before you market the business people are going to be very leery of that. You would probably get credit for the margin increase, meaning we think that higher price will hold, but they're going to model a different net revenue retention and growth rate. How have you seen companies really balance and we're really talking about these two primary growth vectors, which one is adding new logos and one is just selling more to your existing customers through cross sell and upsell. How should a founder think about balancing those, not just focusing on one of those and then more importantly, how does that kind of play out in the process when you're selling your business?
- [09:55]
C
First and foremost you need to create a pricing model that helps do the upsell capability. Again, bandwidth is always at a minimum with founders. And so if you're having to push even into your existing customers and not seeing any natural increases, increases in your existing base, it's just going to be really painful. You have no resources to begin with on the sales and marketing side. So making sure you create a pricing model that creates natural evolution and expansion inside your customers is really important. And that could be different tiers. It could be modularizing your product, knowing where you're going to take this and create features around it, or what we've seen more consistently and be very successful is creating some volume based price on top of a really sticky SaaS, whether that's payments, whether that's usage based. Obviously it's not pure SaaS at that point, but folks are getting really comfortable with how that looks longer term. And so making sure the pricing itself is structured in a manner to balance natural upsells, creating separate teams. I alluded to this earlier on a lot of times founders have the salespeople also being incentivized to do upsells, how they price it for them. The commission structure is just really tough to do in an effective manner to where the salesperson actually prioritizes is upsells. That new customer acquisition just tends to be obviously harder for them, but just much more rewarding. And so separating these teams out has just seen much greater success in creating that evolution. So you have a support team making sure they're comfortable with the product, helping them use it and create adoption. You have a success team who's naturally constantly talking to the customer. What more can we do? How can we improve this or that? Where are you seeing various pain points across your workflows that we can Influence and then a sales team obviously geared towards new customer acquisition and then the last, creating a feedback loop. So you have these now these three different teams. You also have the engineering team. Engineers really love to build new products that they think they don't necessarily have the frontline experience on what customers and prospects are saying. So creating a good feedback loop back into the product team to make sure that you're building things that are applicable and you're going to create natural upsells in that capability. And so having these different systems in place will naturally create the balance where you certainly will always over index investing in the new customer acquisition for land grab as well as that's where it's most effective and just costly. But creating a system where your product and pricing and packaging and who's doing what creates the upsell is really impactful.
- [12:36]
B
And I think one point to keep in mind, particularly if you're looking at new products to cross sell or upsell, not creating them just to create them and really listening to the customer. In the last episode we talked a lot about Fintech opportunities within SaaS and payments and how that actually improves and makes the user experience better. You have a wealth of information now with these customers that you have and you can actually innovate on things that they want and value and that can really help drive the adoption rate upfront and frankly just make that a lot less risky to do that new product development because you know they want it. What's going to be impactful and ultimately drive the user experience. Mike, maybe talk a little bit about how buyers diligence these topics in a process, how it plays out these businesses, the balance between how they're growing, the load goes versus the cross sell and upsell. What comes up in a process during diligence and what's important to remember.
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C
Yeah, an immense amount of diligence on the KPIs. So no founder wants to be whittled down to the success of my business is sitting on a spreadsheet. But the fact of the matter is the spreadsheet, the KPIs is a manifestation of what you're doing in the business. So how you tackle these various different departments and approaches to the market show up in the KPIs now they can be misleading in many cases in making sure that you're positioning it in the best possible way. There's not one definition of churn, but how you influence or how you invest in putting emphasis on different aspects of your business play out in the KPI sheets. So your retention rates, your Gross retention, your net retention, your logo retention, your new customer acquisition, what your LTV to CAC payback periods, all of those things all play in and it really shows where you've pushed thoughtfully and invested. So if you push heavily in new customer acquisition and you haven't really given too much guidelines, your sales team is probably overselling a little bit and bringing in a a lot of customers that might not be the best fit. What you'll then see is an impact on your gross retention or your net retention as a result of that. Because you get early churns, you get some impact, particularly on logo retention, but you see some early churns and just noise in the data. That's why slicing it, finding your right icp, telling the story on the retention side. But that huge customer acquisition cost, yes, help feed the top of the funnel, but you have a leaky bucket because you're bringing in customers that are not good fit. You're also then getting a poor feedback loop on what features and functionality you should be building and that can play into that cross sell capability or issues around upselling and cross selling. And so making sure you're balancing both. But at the same time, if all of our growth is coming from new customer acquisition, well obviously our NRR and GRR are going to be impacted as a result of it. And so you'll also see that in the LTV to CAC ratios. So over time those things will slowly deteriorate. Because the hundredth customer is going to be harder to sell than the first customer customer. Not necessarily, but there is a diminishing return there. And so you start to see your sales efficiency go down, growth rate starts to dip. But because you don't have any sort of methodical nature on how to influence customer growth, you tend to see growth that come down and law of large numbers as the business gets bigger. If you solely are dependent on one element of that, it's just really hard to get that incremental revenue to keep the growth rates high. And that just dips on valuation. And so all of these things play together. It's really about looking at your KPIs, identifying what you're doing well and how. Trading 5% of new customer acquisition growth and investing it into a customer success team to get NRR net revenue retention from 100 to 105 might seem minor, but could make huge differences in impacting what valuation looks like.
- [16:14]
B
I think you make some really good points there. And one of the things that I think surprises founders a lot is they think almost all revenue is good revenue. But your point around the ICP and having the right custom, oftentimes when we dig into the data, we see that 5% of the customers are generating almost all the churn. So it's dragging down the overall metrics. And actually if you look closely at those customers, usually they're the small ones, usually they're the ones that aren't a good fit. So you oversold, you got them. But if you actually looked at it on a margin basis, there's a good chance you're actually losing money on those customers because they also account for a disproportionate number of the calls to customer service. So being really tight about that, you can clean some of that up in the data phase, but you're probably expending resources on customers that aren't that good that you don't realize. I think another thing to point out is if you look at the buyer's perspective, you kind of want to be good in all these areas. So founders sometimes think if I'm not really growing at all, PE firm or strategic can help me. They want to feel like they're working with a good raw material, that they're accelerating. So they want to see good metrics, they want to think they can accelerate it. They're not thinking we can take something from 0 to 40% growth. They're thinking more we could take something from 30 to 40 to maybe 70 or 80. So I think that's really important that you show some value there. And on the upsell cross sell, particularly private equity firms, they're not going to be great at helping you figure out what the next new product is to upsell. They're more about strategy around pricing, packaging, sales and marketing. So you're going to have to come with some of the ideas there. If it's a strategic buyer, maybe a little bit of a difference. They already have a product you can upsell, but I think you want to show some game there, if you will and then look to accelerate those things versus being pretty strong. Strong in one and basically a zero in the other area. So in today's episode we talked a lot about the vectors for growth, pricing increases, cross selling and upselling and then obviously new logo, how relatively hard those are to do and where you should focus your resources and how buyers are going to think about it. Thanks Mike for joining the podcast today.
- [18:12]
C
Thanks guys.
- [18:13]
A
VistaPoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and capital raised transactions. We are a fully unconflicted investment bank who only works for founders on the sell side, so you know that we're always representing your best interests. Security is offered through VistaPoint Advisors member Finra Sipic. This has been provided for informational purposes only. It is not intended to address all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. Clients are not confident compensated for their comments. If you have any questions about the process of selling your business or raising capital, reach out to a member of our team or check out the four Founders section of our site by visiting four Founders Guide.