The SaaS business model has been the talk of the town for some time now. With the potential to expand up to 21.7% in 2023, the popularity of the SaaS business model has gained momentum, and rightly so. This is specifically because of its cost-effectiveness and low barrier to entry.
However, despite being “The Chosen One” (at least for now), many have failed to make it big in the industry. With around 92% of them shutting down operations within 3 years, the odds don’t seem to be in their favor. Significantly few SaaS startups evolve into successful SaaS businesses (out of the 20K+ SaaS companies around the globe, just over 1K have entered the unicorn range, and around 50 are decacorn).
To keep a constant check on what’s working for your SaaS and what’s not and have the scope and ample time to enhance your strategies, you need to be well aware of a key SaaS metric – Monthly Recurring Revenue (MRR). It’s the lifeblood of SaaS, a factor your SaaS will live or die by. And to have a steady SaaS growth curve, you need to keep tabs on your MRR and constantly look for ways to amplify it.
Before we dive into the core topic, let’s start with the basics of MRR.
To put it simply, it’s a number that helps you summarize all the revenue you receive from your paying customers or the monthly recurring payment your SaaS business earns from subscriptions, a metric that is a crucial KPI for subscription-based companies.
MRR = {[New business subscriptions + Upgrades (or expansion)] – [Downgrades (or contractions) + Cancelled subscriptions]} * Average billed amount
MRR can be classified further into New MRR, Expansion MRR, Reactivation MRR, Contraction MRR, and Churned MRR, and they can be as important as their parent term.
A side note: You should always track these MRR separately. They can help you understand your company’s overall growth, whether there was an increase or decrease in the revenue. They ultimately help you define a roadmap to rectify any growth issues beforehand.
Understanding your MRR can help you gain valuable insights into your business and draw revenue-building conclusions. A large part of MRR is consistent (for some companies) and predictable, so with an accurate MRR, you can:
For SaaS, there are two ways you can assess your business’ Monthly Recurring Revenue: The customer by customer method and the Average Revenue Per Account/ User.
This method requires you to add up the monthly fee paid by each customer.
For instance, if Customer A is paying $300, Customer B is paying $200, and Customer C is paying $100 per month, your recurring revenue would be $600. The one problem with this method is that it’s time-consuming, and as your customer base increases and if your SaaS has different pricing plans, it will be quite a task for you to calculate the MRR.
This is a more straightforward and preferable alternative to the customer by customer MRR method. For this, all you need to know is the total number of paying customers and the average amount each customer is paying each month.
MRR = Total paying customers per month * Average revenue per user/account
So, if you have ten paying customers, and on average, each one pays $100 per month. Then your MRR = 10*$100 = $1000.
MRR captures ongoing revenue, and depending on your approach to analytics and your business needs; you can choose to track a variety of MRR types:
New MRR (+) Expansion MRR (–) MRR Churn
$500 + $100 – $250 = $350
As a financial benchmark for companies, a median MRR for businesses with $10-25 Average Revenue Per User is $15,700, while that for $25-$50 ARPU is around $17K and so on.
Owing to its high growth rate, there seems to be less scope to question why people flock to the SaaS business model. Now that you understand what MRR is and how you can calculate it for your SaaS, it’s evident that an increase in MRR will contribute significantly to your business stability and act as a foundation stone for your future business plans.
But how do you ensure that number goes up? We have prepared a list of 11 growth strategies that you can implement for that:
If your product is valuable to the users and solves some real problems, your MRR will always keep increasing. As a SaaS business, you need to make Quality your USP. The quality of your product will speak for itself and pour in on customers. It will become its proponent, and you will hear the sweet melody– Cha-ching within no time.
For users, pricing plays a vital role in signing up for a product, and with most SaaS products being underpriced, it’s wise to try and test a bunch of pricing plan strategies. Here are a few that can help:
It would be best if you avoided the UNLIMITED plans, as it leads to undervaluing your product.
Spend a couple of hours brainstorming on the right pricing strategy and if your product has multiple features, ensure that your prices go up as they opt for those features.
The price of your product should be proportional to the value it generates, so if you offer unlimited storage, users, or additional features, that’s leaving money on the table. And about your customer base, if you’re providing a high-value product and, more importantly, if your customers see that your product saves them time and money, they will see its value.
As a SaaS product, it’s more than likely that sooner or later, you will add additional features to your product. Even if you don’t, your product will still have features that you can split to create an ad-on. So, instead of grouping everything under a single pricing umbrella, you should opt for a more creative way of offering these features.
This will go well if you’ve got a core service, one without any additional features. Doing so will have a 2-way benefit for your product. You can charge an additional fee for the add-ons (increase in MRR), and you will have more features to offer upgrades for those who’d want them.
Another strategy around the pricing plan is offering discounts. As a customer, we love deals, but as the one who’s offering them – Not really. Don’t get me wrong! It’s OK to provide a one-time discount to get more customers but making that a habit and thinking you will retain the customers down the line is too much to expect.
It would help if you thought more about the Lifetime Value of your customer than getting more and more signups. So focus more on building and maintaining healthy customer relationships.
For SaaS businesses, Free trials are the ultimate strategy that helps them attract customers and build their user base. The goal here is to showcase your product and the value it offers in real-time. A crucial factor here is that your product must deliver tangible results within the set timeframe.
Usually, SaaS businesses go for a free trial of 7-14 days. You can try this for your initial set of customers and get feedback from them. If your product couldn’t deliver within the period, you can consider offering a more extended free trial or steer clear from offering one at all.
Consider the example of Ahrefs. They also offer a 7-day free trial, and within that period, it gives users in-depth insights into a website—a tangible value within a short period.
A reasonably new billing form, event-based billing, is metered billing that charges customers for billable events. In other words, it’s a usage-based or consumption-based billing where customers are charged for the precise amount proportional to their consumption. This strategy can be a boon for the users, especially with the ongoing economic contraction.
Although this form of billing sounds a little sneaky, you can tell your customers beforehand that additional fees will be charged based on the events that occur from their use of the product.
This strategy will help you strike off some mundane tasks on your list, such as sending out a short weekly email to educate your customers about the latest product features or what they can accomplish using them. Automating your growth processes like customer acquisition and retention will help simplify your daily tasks and give you ample time to enhance your business strategy.
Conduct a thorough analysis of why your customers are churning; you need to find holes in the leaky bucket to plug corks. But how do you do that?
Once you understand why your customers are moving away from your product, you can build a strategy with churn rate as the focal point. Here’s what you can do:
Providing excellent customer service and prompt support is paramount for the success of SaaS businesses.
Customer satisfaction has a direct impact on your MRR growth. So you can have an in-house customer support team or recruit a third-party team for this. However, your representatives should be aware of the customer history; they need to have all the valuable data at an arms’ length so they can identify who to and what to pitch.
Upselling is just promoting the add-on features of your SaaS product to your customers. For this to work, you need to find the right time to pitch upsell opportunities, for instance, if a user has a complaint or is facing an issue with your product that an upgrade or an add-on can solve. It accomplishes two goals. First, you sell high-priced products to customers who are already paying customers, and second, it maximizes potential revenue from your upselling efforts.
For upsell, all you need to do is have a clear understanding of your customers, which should be a piece of cake if you have all the data ready by your side. You can take it to the next level by developing a drip campaign to target each of your user segments in a personalized manner.
With most SaaS startups leaving a lot of money on the table and some retracting, there’s a good chance for you to outperform and grab the ideal customer you have always desired. As a SaaS company looking to boost their MRR continuously, you need to understand the concept first clearly and what you can do to enhance it to keep the revenue stream flowing. You can try and test the different strategies mentioned above and use analytics and surveys to support you in deciding what will work best for your business.
If you’re a SaaS company on the lookout for a proven partner, let’s have a quick strategy call to help you drive hockey stick growth.
Ameet Mehta
