Quick Note: This article was published on The Matrix marketing group blog. The site owner published my article under a pseudonym, ”Katie Lukes”, but if you scroll to the bottom near the FAQ section you will see my author Bio. I wrote the article and they did some minor edits. Thanks for understanding! View my article here.
I get it, you want to increase your monthly recurring revenue.
But let’s face it, you are inundated with tons of information and don’t know where to start. Or maybe you have not seeked out any information, and you are only starting to search now. Regardless, you stumbled on the right article!
Many up and coming SaaS companies and businesses struggle to maintain their monthly recurring revenue, let alone increase it, so your problem is not uncommon, but just a reality of the business, especially in these times.
It is common for SaaS companies to have a churn rate of 5-7%, according to Baremetrics, but if you are getting more than this and your revenue is sinking, you’re going to have to fix this immediately or face the music.
Before we begin, it is important to make a distinction between loss in revenue and a loss in users. Obviously, if you lose users, but your revenue is still up because of your higher paying customers, you are good to go. So it is important to understand this concept, but you probably already knew that.
The goal of this article is to show you 7 ways to increase your monthly recurring revenue based on real life examples, so that you can improve your business in a tangible, realistic way. Let’s get started!
1.Split features of your product and offer separate payment options for each.
This is a great method that I’m sure many SaaS owners and business owners have heard of, but don’t always implement due to fear of loss. As mentioned in the introduction of this article, when it comes to your monthly churn rate, a loss in revenue is far more serious than a loss in users.
So if you have less users, but they pay higher, you are good to go. But how do you do this?
Split your features, and offer separate pricing for each.
Let’s face it, some customers will not like this, and this will prompt them to search for another product that offers the complete package in one software. But here’s the reality, you will make more monthly recurring revenue in the long run and lose the customers that don’t want to pay, and keep the ones who do want to pay, and have the money to do so.
This may feel like the wrong thing to do, but it is actually the right thing to do for your business, as a key component of success in business comes down to weeding out the people who aren’t serious at all about your product, and instead focusing on the ones who are, and ideally also have a lot of money to spend.
The more you split your features and create multiple products, the chances are higher that your customer will upgrade.
So what’s an example of this?
One example is Adobe. They have such a wide variety of media creation products, but what they do is offer different pricing based on what products you are bundling together. The person who is a photographer for example, may opt to just pay $19.99 per month at first, but then as they are moving ahead in their career, they may realize that they will need to create more intricate illustrations and videos with effects. When that happens, they are more likely to then opt into the all apps bundle at $52.99 a month, rather than find a combination of other softwares.
Another company that does this is Split. You can see on their pricing options that the customer can opt to get even more features and a custom plan, but they will have to work out a new price to do so. This company understands that if their customers’ business grows past the utility of their software, they can adapt to their needs and make more money in the long run.
2.Be careful with free trials.
This is another important concept to understand when it comes to your business.
Finding the right customers, who have the money to pay for your product is crucial, but an often overlooked concept is the idea of managing expectations. Yes moving the freeline will attract customers into your business, but don’t go too far.
So what do I mean exactly?
An example of what may not be effective for your SaaS is offering a version of your software that is free forever, otherwise known as Freemium. This can be problematic in the world of SaaS, as it may serve the complete needs of that particular user initially, thus leading to very little incentive to purchase a premium version of your product.
You also need to keep in mind the method in which you are marketing to your free trial users. Are you limiting the features of your free trial and encouraging the purchase of a subscription? Maybe you offer all features, but are you offering a reasonable time limit, such as 7-14 days? There needs to be an enticing reason to get off the free trial and subscribe, and you need to remind your customer.
Another aspect you need to consider, is if your product can deliver during the free trial. According to Wayne Mulligan of Crowdability, “Do not offer a free trial when your customer can’t get a complete picture of how your product benefits them during a reasonable free trial period.”
Ahrefs is a good example of a SaaS company that gets this concept. They offer a free trial, but if you look at some of their products bundled into their software, they can deliver what they claim to do almost instantly. An example is Site Explorer, which gives competitive research. This product delivers instantly, all within the 7 day free trial.
Model after them. Ask yourself, ‘’Is there a way to make my SaaS deliver results instantly in some way? Are there features that I can adjust to make this happen?’’. When converting your leads, also keep in mind the average lead conversion rate for SaaS companies, which is around 7%, according to a study conducted by Marketing Sherpa.
We may see many SaaS businesses offering a free trial, and some may get into a herd mentality that this is what successful businesses do, but you have to do this correctly, not just do it. If you apply this principle correctly, you will likely see an increase in your MRR, and reduce your churn rate. When customers trust in your service, and get the results they want, the choice to stay becomes more likely.
3.Offer upsells, even in Premium.
I know what you’re thinking…
‘’Doesn’t that make me money hungry? Wouldn’t that annoy my customers?’’. The answer could be yes to both, but there are definitely different ways of viewing this situation.
You have to face the reality that you need money to keep your business afloat, and that upsells and consistent income is crucial for your subscription model to work. Again, Ahrefs is a prime example of this on their pricing page.
Look at it this way: If you offer a lot of value it’s ok, you’re just asking, and they have the choice to say no or opt-out.
And to the other point about annoying customers, you will annoy some, but they are likely the ones who are not fully bought into your product anyways. You want to weed out people who are on the fence, and truly find your tribe of people who love your product, and are willing to pay a lot for it.
4.Raise your prices, but in an effective way.
This may seem obvious, but it often is avoided due to fear of loss.
A good way to look at this situation is through realizing the value you are bringing. If you are constantly updating your product, listening to your customer feedback and in general striving to make your product better, you can and should raise your prices.
This may upset some users, and some will unsubscribe. But the reality is you need to separate the real customers from the pretenders.
An example of this is when Appcues increased their prices. They claimed to have raised their revenues by 263%, and they did so by notifying their customers in advance, through an email showing the coming changes. The key components to this method is experimenting with your pricing based on profit margins, and notifying your customers in advance of the changes (usually a month before).
You also need to consider doing calculated risks when price testing. Appcues explains on their blog that you shouldn’t impact your existing paying customers through experimenting, but what you should do instead is test pricing on new customers, and influence those prices through feedback from your existing customers.
5. Plug the holes: Increase revenue by understanding the real reasons why your customers are leaving.
This is really a strategic move that every business and SaaS should already be doing, and doing so in a tactical way.
You want to do exit surveys, but you need to also go the extra mile through two ways. 1) Have very good customer service, and 2) Do personalized follow-ups as much as possible.
We’ve all heard about how important customer service is, but it is more of a nice saying than something companies actually do. According to Twilio, they found that 90% of their respondents favor using messaging, but as many as 52% of businesses do not have the softwares to do so.
You also need to keep in mind that your customer relationships are sensitive. 80% of respondents to a survey conducted by Hubspot, reported that they stopped purchasing from a business due to poor customer service or a poor experience.
The second aspect that many business and SaaS owners overlook is personalizing their follow-ups, and when I say personalize, I don’t mean just addressing them by their name.
A good example of a personalized follow-up is what CEO of Pigeon, Pat Walls does. He claims that he gets better information from his customers who cancel, because he builds a relationship beforehand. He does this through sending a personalized video message to every new free trial sign-up, saying thank you and welcoming them.
Through this method, if they do end up cancelling, they are more likely to respond to questions about why they are leaving. He sends a follow-up email and notifies the person that it is not an automated email, but a real one genuinely asking why they canceled. This is yet another technique that many business owners should implement, especially in these hard economic times.
6.Offer yearly payment options.
This is another crucial way to improve your MRR, that more and more SaaS companies are coming to realize works.
The key to this method is emphasizing a yearly subscription over just a monthly payment. Many companies will give discounts on the monthly price, and they do this in order to encourage paying a bulk amount upfront.
According to a study done by Profitwell entitled ‘’The World’s Largest Study on SaaS Churn’’, they found that companies with higher Average revenues per user (ARPU) tend to have a lower churn rate. Patrick Campbell goes on to explain that his study found ARPU’s that are of a high amount, $500 for example, see a churn rate of around 2-6%, compared to 3-16% for ARPU’s that are under $100.
This is likely because of the high investment these types users initially commit to, and extra perks that come with a higher upfront investment. The higher the investment, the more likely they are to be serious customers who are willing and able to pay. It really plays into the commitment and consistency principle that Robert Cialidini talks about in his book Influence: The Psychology of Persuasion.
7.Win at the comparison test.
This is more of a big picture concept, and it is crucial for increasing your monthly recurring revenue.
You are going to have to take a good hard look at your business, and really question how it stacks up compared to others. What is it that potential customers in your market truly care about? If you can be really good or the best in a category your customers care about, you can dominate with those people.
This is taken directly from ahrefs CMO Tim Soulo, from an article he wrote on Entrepreneurs Handbook.
He explains the process that ahrefs went through to really stand out in a crowded field of seo tools, and really it comes down to the concept of winning the ‘’comparison test’’.
Things to consider are the functionalities, the UI/UX, how easy it is to learn your software, the price, integrations available etc…
In an ideal situation, you will dominate in all these categories, but to start, just focus on one and then move forward. Ideally, focus on an aspect that is truly crucial, like quality of data or the learning curve. This is exactly what ahrefs did when they realized they weren’t growing and getting out competed, according to Tim in his article.
4 FAQ questions related to this article
1.Which is more important, Monthly recurring revenue or Annual recurring revenue?
When it comes to SaaS companies and business in general, your Annual recurring revenue is the most important factor. You can lose Monthly recurring revenues, but still retain higher paying clients that keep your annual revenue up.
2.How do you calculate your monthly churn rate?
You take the total number of customers who cancelled your subscription (churned), and divide it by your total number of active customers.
3.What is considered a good SaaS growth rate?
It will depend on where you’re at. If you are a new start-up, getting your first few customers and profitability is your first goal. If you are already profitable, you now need to consider the Mendoza line. Put simply, your company should be making an ARR of $100 million before making an IPO, and your revenue should be growing by 25% or more each year.
4.What are some important SaaS and business metrics to keep in mind, with this economy and beyond?
- What is the net MRR Growth Rate, and Churn Rate?
- What is the Gross churn rate of your MRR?
- Did the MRR Rate increase?
- What is the average revenue of your active accounts?
- Are you seeing an increase in qualified leads per month? (Lead Velocity Rate)
- How much time does it take to recuperate the cost of acquisition? (CAC Payback Period)