The key to sustainable SaaS growth is to deliver continued value to customers while also increasing your monthly recurring revenue.
According to Pacific Crest, It takes $1.15 on average to acquire each dollar of new customer revenue, and just $0.57 to acquire that dollar from existing customers. So in order to maintain SaaS growth, it’s absolutely essential to increase revenues from your customer base over time.
This is why Average Revenue Per Unit (ARPU), is such an important metric. As the name suggests, ARPU measures how much recurring revenue you’re generating per unit – that is, per account or user, depending on your business model.
This is how you calculate ARPU:
Average Revenue Per Unit (ARPU) = Total Monthly Recurring Revenue / Total Units
If you’re successfully growing your ARPU, you’re in good shape. Otherwise, it’s time to take a serious look at how you can start doing so, or risk seeing your growth stagnate.
Here are five ways to raise your ARPU:
If you’re not already charging customers on a variable scale, you’ll definitely want to consider making the change.
Flat rate pricing might be alright for new SaaS companies that are still figuring out their product-market fit. But once you’ve obtained a fair number of repeat customers, and have a better idea of the value you’re providing, it’s time to start pricing your software based on that value.
Variable pricing is immensely powerful because it allows you to automatically grow alongside your customers. Not only is this an effective natural lift for your ARPU over time, it also puts you and your customers on the same side, since their success becomes your success. While it might sound very qualitative, that alignment of incentives can be very conducive to building loyal, long-term relationships with your customers.
There are many different ways of implementing variable pricing, but all of them involve scaling along some type of “value axis”, such as usage or revenue. For instance, Google’s G-Suite for Business charges customers on a per-user basis.
Another way to link pricing to customer value is to provide upgrade opportunities for advanced or premium users.
This is typically done by segmenting the offering into several tiers, with each tier providing a different level of functionality at a specific price point. In some cases, SaaS companies have also combined software tiers with a variable value axis, most commonly by offering tiered pricing on a per-user basis.
Unlike pure variable pricing models, upgrades don't offer as “smooth” of a path to revenue expansion, since the customer has to actively decide to make the upgrade. However, that clear dividing line also comes with an upside, which is the opportunity to target specific buyer personas. SaaS companies can design one tier of features for small businesses, another for medium-sized startups, and yet another for enterprise customers. From a sales and marketing perspective, this can be very advantageous.
Salesforce is the most prominent example of this model, with per-user pricing segmented by tier. The names of the tiers themselves – Essentials, Professional, Enterprise & Unlimited – clearly refer to the different buyer personas that Salesforce is targeting with each plan.
Many of your customers would have initially purchased from you due to the appeal of one particular solution. But they certainly have other business problems that can be solved with good software, and why shouldn’t you be the one to provide that solution?
Cross-selling leverages the established relationships you have with your existing business partners to offer your customers even more value through different (though often integrated) software products. Compared to variable pricing and upgrades, this typically involves more work on your part to do this effectively. However, the payoff can also be much larger, since you can potentially double the ARPU of the integrated solution. And once you’ve successfully sold the new software, it too will deliver revenue expansion over time from variable pricing and upgrades.
Offer Non-Software Products and Services
Many SaaS companies naturally develop valuable domain expertise through their experience in a specific market. That expertise can be monetized in the form of premium reports, online courses and consulting services.
Selling information and consulting services is not only profitable, but can also be a powerful marketing channel for your software solutions. At the end of the day, customers buy your product not just because of its technical features, but because of their implicit trust in your expertise and customer service. Teaching and consulting provide a natural platform for you to showcase those qualities in a public setting, while increasing your ARPU at the same time.
Basecamp is a great exemplar of this approach. In addition to their flagship project management software, they also sell online courses, expert reports and even physical books that position them as thought leaders in their space.
Sometimes the simple approach is best. And when it comes to increasing ARPU, what could be simpler than raising prices?
You work hard to continuously improve your SaaS solutions, and deliver greater value to your customers over time. But if you’re like many software companies, you probably haven’t captured any of that value, with your prices staying the same as they’ve always been.
Often, this is because developers are worried that customers will get mad or leave in droves if they have the audacity to change the terms of the original deal. The good news is that this is relatively unlikely to happen, as long as it’s done tastefully, and your existing customers feel they’re getting fair value.
Take a page from Close.io’s book. When they decided to raise their prices, they sent out an email to existing customers announcing the change in advance, and gave them 14 days to buy new seats at the original price for life. Not only did they not lose customers, they actually got a significant bump in new seats over that 2-week period.
Of course, you can only raise prices so much in a given period of time, so it’s best to rely mainly on the other methods for increasing ARPU. But for a quick one-off bump, few techniques can achieve so much for so little effort.
For more insight on how to effectively raise your software price with minimal backlash, you can read our guide on the essentials.
Increasing ARPU is critical to the sustainable growth of your SaaS business. By using the methods described in this article, you’ll be able to expand revenues for much less than what you’d pay for a new customer. Do that consistently, and you’ve got a great recipe for long-term SaaS success.