One of the most challenging aspects of building a SaaS company is designing a sustainable business model. These companies rely on strong customer bases that remain loyal month after month.
Omar Nawaz, Chief Product Officer at Chargebee, has three lessons for managing a subscription-based business, and how executives can think through growth planning to develop the right revenue model.
How organizational design informs subscription models
Subscription businesses cannot ignore the customer lifecycle. Customer needs are constantly changing, and they may ask to add and remove features over time. What is right for your customer at one point might not be a few months later.
That dynamism get built into the business model. As you adopt new systems, it is important that they match the experience you want to deliver to your customers. You also need to be able to track these changes and measure them to get a true understanding of the health and success of your business.
What levers can SaaS companies pull to stay competitive?
Companies need to know what levers of change are available to them. You can adjust these various elements of your business to strike the right balance between growth and profit. He suggests four levels:
- Adoption: Making your product essential so customers will want to keep buying it
- Expansion: Acquiring new customers who will have a high customer lifetime value
- Retention: Making sure you don’t lose the customers you acquired
- Pricing: Seeing whether the price is right for the market and for your customers
Look at adoption, expansion and retention together to get a better picture of the business. For example, at any given time, about 13 percent of your subscribers are up for renewal. IIt is then up to you to provide value to retain those customers, and your value will dictate your price.
To accomplish this, start by identifying your heavy users and light users. Create a basic core package for light users, and then develop add-ons for your heavy users. This creates value for both audiences.
The value of your product will always be changing. Changes in the market or trends in customer spending will increase or decrease your value. It is up to your company to adjust to these changes to bring in and retain customers.
The metrics SaaS executives should track
Those four levers are only valuable if you measure the impact of your changes. Omar offers a few key metrics within the RevenuStory Dashboard of Chargebee that he finds valuable:
- Monthly Recurring Revenue: Revenue expected each month from recurring payments
- New MRR: The revenue driven by new subscribers
- Expansion MRR: Additional income from existing customers
- Churn MRR: The amount of revenue lost from cancellations
Omar also encourages teams to look at Customer Acquisition Cost (CAC) over time. Your CAC will change along with your business. Early on, it should be high as you invest in marketing and promotion. Later, it should drop as you build your customer base and start to expand your offerings.
The core message that Omar presents is that the subscription-based customer keeps changing. For the business to grow, it needs to be able to adapt to these changing needs while remaining profitable.