Dan Martell - January 27, 2020


How To Use Your SaaS Growth Ceiling For Positive Change

Hosted by
Dan Martell
Mentioned
Andrew Grove
5 Business Lessons Learned Riding Backcountry Snowbikes Helping Leaders Get Feedback & Grow Faster with Claire @ KnowYourTeam.com - Escape Velocity Show #20

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Length

9 minutes

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195.87

Word count

1,937

Sentence count

115

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Summary

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If you have a SaaS business, you have actually a growth ceiling for positive change. That's because if you have clients that cancel in any business, that at a certain point, your ability to add new customers per month will not outpace the amount of churn that you lose on a monthly basis. In this episode, you'll learn how to figure out when the growth ceiling occurs and what you can do to push it out way out into the future.

Transcript

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00:00:00.000 Hey there, Dan Martell here, serial entrepreneur,
00:00:01.760 investor, and creator of SaaS Academy.
00:00:03.320 In this video, I'm going to teach you
00:00:05.440 how to use your growth ceiling.
00:00:07.320 So if you have a SaaS business, you have actually a SaaS growth
00:00:10.280 ceiling for positive change.
00:00:12.720 I'm going to teach you how to understand when
00:00:15.080 this ceiling is going to happen, when the wall occurs,
00:00:18.360 and what you can do in your business today
00:00:20.320 to make sure that you push it out way out into the future
00:00:23.640 and continue growing your business.
00:00:24.840 Be sure to stay to the end.
00:00:26.040 We're going to tell you how to get access to my free churn
00:00:28.080 Buster Cheat Sheet Guide, which covers the five principles
00:00:31.420 you need to implement to increase retention of your revenue
00:00:34.360 and also the nine box framework to be
00:00:36.780 able to implement those turn busting tactics quickly.
00:00:40.260 Let's get into it.
00:00:53.800 So one of the first things that I
00:00:55.480 do with all my new coaching clients,
00:00:57.140 because I only coach B2B SaaS founders, software as a service,
00:01:01.820 is teach them how to think about membership
00:01:04.700 or reoccurring revenue.
00:01:06.180 And I'm going to link up the tool I use below,
00:01:09.100 but one of the concepts is the growth ceiling.
00:01:12.100 That if you think about it, if you
00:01:14.240 have clients that cancel in any business,
00:01:16.980 that at a certain point, your ability
00:01:19.160 to add new customers per month will not outpace
00:01:23.360 the amount of clients, the net, what's called the logo churn,
00:01:26.440 the net logo churn that you lose on a monthly basis.
00:01:29.240 Here's how the math works out, OK?
00:01:31.320 I'm going to do a little bit of math.
00:01:32.840 I need you to think through this, but it's
00:01:34.120 going to be super simple.
00:01:35.460 If you add 100 new clients a year, but you lose 20% of them,
00:01:41.060 what you want to do is take the total new number of clients,
00:01:44.480 multiply times your churned rate, which is 0.20,
00:01:48.960 and that'll let you know what's the max number of clients
00:01:52.460 you'll ever be able to have because you're churning
00:01:55.820 through the new ones on an annual basis
00:01:59.200 to be able to replace the ones that you're adding the new ones
00:02:02.280 to replace the ones you lost.
00:02:03.740 So the number is 500.
00:02:05.260 So you have 100 that you add every year.
00:02:07.280 You have 20% annual churn.
00:02:09.800 That means you'll max out at 500 total clients.
00:02:14.180 Now, what's your max revenue, the growth ceiling
00:02:17.300 for your MRR, your monthly recurring revenue?
00:02:19.700 Well, it's simple.
00:02:20.340 You take your, it's called ARP.
00:02:23.300 Some people call it ARPU.
00:02:24.480 I call it ARPA.
00:02:25.920 Average revenue, so if you're a B2C business, business
00:02:28.620 consumer, you're going to use average revenue per user.
00:02:30.960 If you're B2B, which hopefully you are if you're in SAS,
00:02:34.720 is business to business, it's your average revenue
00:02:37.320 per account, OK?
00:02:38.300 So let's just keep the number simple.
00:02:39.860 Let's call it $100.
00:02:42.080 If you multiply the 500 times 100,
00:02:44.300 that equals $50,000 in ARR, annual reoccurring revenue.
00:02:48.980 So with your current numbers, if that was you,
00:02:52.360 you would max out at $50,000 of annual reoccurring revenue
00:02:56.120 per year, OK?
00:02:57.740 So regardless of what software business you're in,
00:03:00.760 if you run your numbers, again, I'm
00:03:02.360 going to link to a calculator below.
00:03:04.600 So you can click it, put your numbers in for your own business
00:03:06.920 and figure out when's the wall.
00:03:08.880 The wall is when you're at 75% growth potential,
00:03:12.580 because at first it can seem steep,
00:03:14.300 but then you hit this kind of elbow.
00:03:16.600 And then the flat, I call it the churn flat line,
00:03:19.300 when you hit the growth ceiling is essentially
00:03:20.960 when you're going to max out.
00:03:22.340 Now, the good news is I'm going to teach you how to fix this.
00:03:24.760 These are the three strategies by priority
00:03:27.200 that you need to implement and focus on
00:03:29.080 to push off your growth ceiling as far as possible
00:03:32.780 into the future.
00:03:33.800 Number one, reduce churn.
00:03:35.820 So I know a lot of you guys are like, Dan,
00:03:37.920 I've done a bunch of studying.
00:03:39.560 Churn, churn, churn.
00:03:40.440 How do I retain customers?
00:03:41.580 I'm just going to walk you through the things
00:03:43.340 that I do with my clients.
00:03:44.380 Number one is we fix positioning.
00:03:46.580 Too often, I see, especially for folks
00:03:48.800 that come from an internet marketing background
00:03:50.660 or a sales-heavy background, is you're overselling
00:03:53.600 the opportunity for your software.
00:03:55.520 You're positioning it as a business opportunity.
00:03:58.000 You're positioning it as the silver bullet
00:04:00.900 to help businesses solve every problem in their life.
00:04:03.440 And it's just not.
00:04:04.140 So positioning is a key thing.
00:04:05.600 Trial, the trial activation.
00:04:08.060 So how you activate your new customers,
00:04:11.720 either through a trial or even onboarding them
00:04:13.940 after you sold them through a demo process,
00:04:16.140 that needs to be figured out.
00:04:17.300 And then finally, it's just what's
00:04:18.660 your process for retention?
00:04:20.240 Here's something simple.
00:04:21.120 I was walking my client through this recently,
00:04:23.220 where on a monthly basis, they were losing $12,000
00:04:27.060 through retention churn.
00:04:29.420 So essentially, they weren't retaining the customer.
00:04:31.320 They were losing $12,000 a month.
00:04:33.340 And I asked them, I was like, what percentage of that
00:04:36.240 is lost because the customer's never activated?
00:04:38.520 So probably half.
00:04:39.380 So I'm saying $6,000 a month, you're
00:04:41.860 losing every month because the people signing up
00:04:45.760 didn't know how to use the product yet.
00:04:47.220 You could pay somebody half of that
00:04:49.580 to just get on a call, set it up for them, support them.
00:04:54.300 And it compounds.
00:04:55.820 And then over time, you can write the code
00:04:57.860 to automate a lot of the manual process.
00:04:59.700 But those are the areas that you need
00:05:02.120 to focus on to reduce your churn at a high level.
00:05:04.800 I'm going to tell you how to get access to my Churn Buster 1.00
00:05:06.800 Cheat Sheet that goes into this at depth.
00:05:08.840 But you want to make sure that the positioning, the conversion
00:05:11.180 process, and your retention system
00:05:13.480 is in place to reduce your churn.
00:05:15.860 Number two, increase ARPA.
00:05:18.060 Average revenue per account.
00:05:20.220 Essentially, it's you want to monetize more.
00:05:22.080 You want to figure out how can you create more value
00:05:25.320 for your customer and capture more value.
00:05:26.960 So the low-hanging fruit for many founders
00:05:29.520 is, number one, you need to have a value metric for pricing,
00:05:33.180 meaning that the more value that's
00:05:34.880 extracted from your product, the more the customer ends up
00:05:39.900 paying.
00:05:40.400 So sometimes you'll see this as a per seat pricing,
00:05:43.620 some kind of metered pricing per transaction,
00:05:46.220 number of contacts, et cetera.
00:05:48.240 But that's value metrics.
00:05:49.520 Number two, right off the bat, just so you know,
00:05:51.860 you should just raise your prices.
00:05:53.080 I know you're reading this, and you probably thought about it.
00:05:56.000 The best SaaS companies, and here's
00:05:58.240 a really great question to ask yourself how to deal with this.
00:06:00.760 I got this from Andrew Grove from High Output Management.
00:06:03.400 If somebody bought my business tomorrow,
00:06:05.120 what's the first thing they would change?
00:06:07.180 And I'll tell you, if I bought your SaaS business,
00:06:09.180 I know the first thing I would change
00:06:10.520 is I'd put your prices up, even by 20% or 15%,
00:06:13.400 because it will have no impact.
00:06:15.300 The yield pricing will outweigh 100%
00:06:17.680 the lack in what you think is conversions or trials
00:06:21.160 or whatever.
00:06:21.880 So increasing your pricing.
00:06:23.540 And then third is have add-ons.
00:06:25.620 Look at the features that may be in your middle plan
00:06:28.940 are only being used by 30% to 40% of the customers.
00:06:33.120 And consider ripping it out and charging a price per month
00:06:37.100 for it so that it can be used by folks
00:06:39.480 in the smaller and the upper end plan.
00:06:43.260 And it increases your ARPU.
00:06:46.320 ARPA.
00:06:46.820 Sorry, I keep mixing them up.
00:06:47.880 So average revenue per account.
00:06:49.140 But here's the kicker is most of you guys
00:06:50.900 can just add a premium level of service, a premium support
00:06:54.160 feature as an add-on, maybe $100 a month,
00:06:56.800 and that will raise your average revenue per account.
00:06:59.260 So just do those things to make sure
00:07:02.160 that you can increase your monetization, your revenue,
00:07:04.740 from your current customers so you can reinvest it in growth.
00:07:07.660 Number three, grow customers.
00:07:10.160 So the third option you have to kind of push off
00:07:13.080 The growth ceiling is to increase the number of new customers
00:07:16.260 that you add on a monthly basis.
00:07:18.080 So if you're stuck at 10 every month,
00:07:20.680 you need to go to 12, 14, 15, 16.
00:07:23.400 How do you do that?
00:07:24.700 Here's the strategy.
00:07:25.700 One is you have to do a growth map.
00:07:27.760 You have to analyze what you're working on right now
00:07:30.520 and figure out where is the ROI.
00:07:32.260 Because you could be doing stuff today
00:07:33.860 that you don't even know is working.
00:07:35.600 But because you haven't looked at all the different channels
00:07:37.940 and marketing and where customers are coming
00:07:39.900 and hearing about you, you don't even
00:07:41.600 know where you should invest your time
00:07:43.260 to amplify those channels, OK?
00:07:45.740 So that's one.
00:07:46.700 That's the auditing of your growth map.
00:07:48.860 And then number two is you've got to operationalize your funnel.
00:07:53.280 So the way I think about it is there's four key steps
00:07:55.640 to any marketing funnel.
00:07:56.960 There's the channel you put your message in.
00:07:58.740 There's a lead magnet that you use
00:08:00.240 to convert the viewer to an email address.
00:08:04.480 The third is a conversion tool you're
00:08:05.900 going to use to convince them to buy your products.
00:08:08.640 So it's either a trial, a demo, or a proof of concept sale.
00:08:11.720 Very similar to demo, but more for enterprise.
00:08:14.020 And then third, if people don't buy
00:08:15.540 or they're in the trial process, what's your follow up formula?
00:08:18.780 What do you send on a frequency to make sure
00:08:21.100 that you educate them and convince them
00:08:23.260 that your product is the best solution for them?
00:08:25.800 So if you don't operationalize this,
00:08:27.400 then it's never going to work.
00:08:28.480 And then the third that you want to consider
00:08:29.820 is even moving up market.
00:08:32.100 Some of you guys have products that
00:08:33.640 could sell to a bigger customer.
00:08:35.540 And by doing that, you may reduce the number of customers,
00:08:38.600 but you'll increase your average revenue per account
00:08:40.760 because it's a bigger deal.
00:08:42.620 But you need to grow your customers.
00:08:44.840 So quick recap, how to use your growth ceiling
00:08:47.060 to motivate you to make critical changes in your business
00:08:50.060 in a positive way.
00:08:51.080 Number one, we need to reduce churn.
00:08:52.920 Number two, we have to increase our ARPA, average revenue
00:08:55.220 per account.
00:08:55.940 And number three, we need to grow our customers.
00:08:59.420 As I mentioned at the beginning of this episode,
00:09:01.420 I want to share with you a free resource called the Churn
00:09:03.500 Buster Cheat Sheet.
00:09:04.780 It's my process, the five core principles
00:09:07.440 that you need to implement to think about reducing churn
00:09:10.180 across your business, and then the nine specific strategies
00:09:13.980 that you want to use to be able to instrument, learn,
00:09:18.420 and fix your churn.
00:09:19.920 If you're losing customers, they're
00:09:21.360 coming in the top of the funnel, and it's
00:09:23.060 like a leaky bucket and they're leaving,
00:09:24.960 click the link below to download your copy of the Churn Buster
00:09:28.040 Cheat Sheet.
00:09:28.920 And if you like this video, be sure
00:09:30.780 to smash that like button.
00:09:32.480 Click the notification bell so you
00:09:34.200 You get notified when I drop new videos twice per week.
00:09:37.860 Every week I drop new videos.
00:09:40.000 And if there's somebody that you think
00:09:41.400 that could benefit from this video,
00:09:43.200 feel free to share it with them directly.
00:09:44.760 As per usual, I want to challenge you
00:09:46.080 to live a bigger life and a bigger business.
00:09:48.000 And I'll see you next Monday.
00:09:50.480 Dan, how do you fix it?
00:09:51.520 Well, great question.
00:09:52.560 Let me talk about it.