Churn. It’s an ugly word for an unpleasant phenomenon every founder wishes didn’t exist. Unfortunately, though, churn is a harsh reality of life in the SaaS product world. As your company grows, the number of customers who no longer use your product is going to organically grow as well. You can’t change that, but you can minimize the impact.
Most people deal with the uncomfortable truth of churn in one of two ways. The first method is to put a positive spin on it and make it sound a lot less serious than it actually is. As Steve Efti points out in Close.io, “A lot of founders have a tendency to calculate churn in a way that makes their company look best. That way, when they get together in a room, they each can brag about how great their churn looks.” But hiding your head in the sand doesn’t do anything to actually address the underlying problem.
The other way that people generally try to offset the revenue loss caused by churn seems like a more reasonable one at face value. They focus on acquiring new customers to replace the ones who have churned. But there’s a problem with relying solely on this approach: Getting all those new customers costs money. And the more revenue you're losing through churn, the more new sign ups you need to replace that lost revenue … and the more money you have to spend in CAC to do it. It can feel a bit like running on a hamster wheel, and it’s not a sustainable scenario for long term growth.
Of course one answer to the churn problem is to be proactive. Focus on leading indicators of churn and reach out to customers before they cancel. And while you most certainly should incorporate this into your game plan, there’s another, more impactful, approach you can take to offset the revenue you’re losing through churn. And you don’t have to spend a single dime acquiring new customers to do it. Instead of thinking solely about acquisition and retention, think about growth -- no matter how early it is in your product’s lifecycle.
In fact, one of the best ways to mitigate churn is by generating expansion revenue from the happy customers you already have. Expansion revenue can be a real game changer. After all, what founder wouldn’t want to exceed the revenue they’re losing through churn by leveraging their current customer base? As Lincoln Murphy points out in his Sixteen Ventures blog, “It’s a lot easier to get more money from a customer who’s happy and already paying you than it is to get money for the first time from non-customers.”
So how do you go about generating this expansion revenue? Think upsells and cross sells. Simply put, when you upsell, you’re enticing customers to upgrade to a more expensive plan that comes with more features and delivers greater value. Cross selling, on the other hand, is about selling additional products or services that will enhance the value of a service a customer is already using.
Be aware, though, that expansion revenue through upsells and cross sells does not necessarily mean free money. Murphy also cautions that:
There may be a cost [to generating expansion revenue], perhaps a substantial one – to create and deliver the additional service, but as long as the desired margins are there, not having a plan to expand revenue is quite simply a wasted opportunity.
Before you jump into your upselling and cross selling efforts, it’s important to make sure you have the necessary conditions in place to succeed. Here are some considerations to keep in mind:
- In order to effectively upsell or cross sell to your customers you should have a methodology in place that allows you to identify your most avid, engaged users who would be responsive to your efforts.
- Understand the unique value you’re delivering to your customers, and identify ways to offer additional value through both upgrades and add ons. Creating a Job Desirability Map is an excellent tool to help you identify unmet customer needs and clusters of additional value that you could offer.
- Before you reach out to customers, know the answers to questions such as: What extra value will people get if they upgrade? How will a more expensive plan or add on improve their experience?
- To make upgrades more appealing to your customers, make sure that your pricing tiers are clearly linked to increasing levels of value. That way, customers can immediately grasp the benefits of choosing a higher-priced package. We explain how to do just that here. Video marketing platform Wistia, for example, has a simple pricing plan that clearly conveys the increased value in each successive pricing tiers. Their free plan gives users space to upload three videos. It’s a no brainer, then, for happy and successful customers to want to upgrade to the next tier and receive space for 150 -- and so on up to premium.
- Just as with upsells, any additional products or services you plan to offer through cross sells must also be linked to enhanced value delivery for the customers you’re targeting. As always, success hinges upon your understanding of the extra value you could provide. To go back to the Wistia example, an example of a cross sell would be their video marketing integration service which allows users to (among other things) collect leads from their videos and personalize interactions. This feature doesn’t expand on the basic value of their core offering (space for video uploads), but rather enhances the value of the experience they’re already paying for.
If you have any lingering doubts about the power of expansion revenue to mitigate churn, consider the case of SaaS analytics service ProfitWell. They offer one and only one “plan” for their SaaS analytics dashboard service: $0 for an unlimited number of users. And there’s no time limit.
So how do they make any revenue at all? They make it all through upgrades. It’s a risky plan, and it all hinges on ProfitWell’s thorough understanding of the value they’re providing to their customers. If they get them hooked through value delivery in the freemium plan, they reason, people will upgrade in order to experience even higher levels of value.
And therein lies an important lesson for any SaaS company who is looking to mitigate churn through expansion revenue. It’s never early to focus on growth. Understand the value your product offers. And then clearly demonstrate to the happy customers you already have how they could enjoy even greater value -- at a higher price point.