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Driving SaaS Growth Through The Customer Lifecycle

saas growth SaaS growth isn’t a goal; it’s an obsession. The good news is that SaaS growth can be very smooth and predictable, because of the SaaS recurring revenue subscription model. The bad news is that SaaS growth can also be predictably slow the bigger you get. After a few years of rapid SaaS startup growth, it’s easy to find yourself on the short end of the hockey stick if you don’t know the right levers to push.

The Three Levers to Break Through the SaaS Growth Ceiling

At any given time, you can calculate the SaaS growth ceiling for your SaaS business with a simple formula: customer acquisition rate divided by percentage churn rate. For example, if you acquire 200 new customers each year and your percentage annual churn rate is 20%, then at 1,000 customers ( 200 / 20% ) your growth will slow to zero, because customer churn will equal new customer acquisition of 200 customers per year. New customers come in the front door, while old customers leave out the back. Moreover, you will begin to hit the SaaS growth ceiling in exactly one average customer lifetime of 5 years, equal to 1 divided by your 20% churn rate. Finally, your SaaS growth revenue ceiling will equal 1,000 customers times your average customer subscription, e.g., $10M per year for an average subscription of $10,000 in annual recurring revenue. Without a fundamental change to your business, that’s all the SaaS growth you get.

This SaaS growth ceiling depicted in this example is calculated generally by the following basic formulas from the SaaS metrics series.

max SaaS company # customers = acquisition rate ÷ % churn rate

max SaaS company revenue = acquisition rate x average subscription value ÷ % churn rate

Alternatively…

max SaaS company revenue = acquisition rate x average customer lifetime value

This last formula highlights two of the three fundamental SaaS growth levers: acquire customers faster and increase customer lifetime value. If you double your customer acquisition rate, the SaaS growth ceiling doubles with it. Double customer lifetime value by doubling average subscription value or halving your churn rate and again the SaaS growth ceiling doubles.

In the end, however, churn always wins. Churn scales with the size of your customer base. Churn is negatively viral and can only be countered completely by a positively viral growth lever: network effects. Adding more sales reps and increasing your marketing spend are not enough. These strategies may increase your acquisition rate, but to outpace churn you must increase your acquisition rate again and again and again.

The SaaS Growth Levers Follow the Customer Lifecycle

The three fundamental SaaS growth levers: customer acquisition rate, customer lifetime value and viral customer network effects arise naturally and sequentially as a SaaS business matures. You have to acquire a few customers before lifetime value becomes important, and you have to acquire and nurture many loyal customers before network effects kick it. As your SaaS business evolves, you may find yourself cycling through each lever as your highest potential source of SaaS growth.

The three levers of SaaS growth also map nicely to the individual SaaS customer lifecycle as it evolves from initial purchase to deeper use of your product to advocacy within your customer community. Each stage of the SaaS customer lifecycle offers unique opportunities to drive SaaS growth.

saas growth customer lifecycle

The three levers of SaaS growth: customer acquisition, lifetime value and network effects
map to the SaaS customer lifecycle and each stage of the SaaS customer lifecycle
offers unique opportunities to drive SaaS growth.

The diagram above visualizes the deep relationship between the three fundamental levers of SaaS growth and the SaaS customer lifecycle. When read from left to right and bottom to top, each block of this SaaS growth pyramid highlights a proven strategy for SaaS growth that is directly linked to the SaaS customer lifecycle, beginning with driving prospects through the purchase funnel to saving customers that could churn and upselling those that don’t to nurturing a customer community that fosters advocates of your service and drives viral growth.

This is the first post in a series that explores strategies and tactics for driving SaaS growth. Having introduced the three fundamental levers of SaaS growth and their direct relationship to the SaaS customer lifecycle in this article, future posts will focus on each of the ten proven strategies for driving SaaS growth in the SaaS growth pyramid above with real-world advice on how to put each strategy into action. Stay tuned!

If you liked this post, then you’ll love the eBook of the complete SaaS growth series. And if you like it, please share it!

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8 More Comments at Chaotic Flow:

  1. Sreekumar, 26. June 2013, 23:44

    Chaotic – flow is almost like a SaaS school. Thanks Joel !!!

    Driving SaaS growth is definitely a concern for anybody associated with this business. The post has really initiated certain interesting thoughts. Expecting more on this, soon

    If you double your customer acquisition rate, the SaaS growth ceiling doubles with it. What could be the best lead conversion rate as per your analysis.

     
  2. Finding Your Key Metric May be Worth $X0,000 (Pingback), 3. July 2013, 5:32
     

    […] is a nice post about this by Joel, where he tells you how to find your SaaS Growth Ceiling . If a company finds itself stuck in the ceiling, their prominent key metric is […]

     
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    […] Driving SaaS Growth Through The Customer Lifecycle […]

     
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    […] acquisition and customer lifetime value. Simply multiply these two numbers and you get your SaaS growth ceiling, the most revenue your SaaS business can ever achieve. Period. The end. If you want to change your […]

     
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    […] You can get more details and ideas from Joel’s superb growth ceiling article Driving SaaS Growth Through The Customer Lifecycle. […]

     
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    […] is the fourth post in a series that paves the path to sustainable SaaS growth. The first post in this SaaS growth series introduced the concept of the SaaS growth ceiling, as well as the three fundamental SaaS marketing […]

     
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    […] “Driving SaaS Growth Through The Customer Lifecycle”, Joel York, June 11, 2013, http://chaotic-flow.com/driving-saas-growth-throughout-the-customer-lifecycle/ […]

     
  8. 13 Best Customer Acquisition Channels For SaaS Startups (Pingback), 24. November 2016, 12:48
     

    […] If your customer is happy with your solution, they’ll stick to your brand and even refer others to you. And you can drive SaaS growth throughout the customer lifetime cycle. […]

     

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