by Christophe Primault
Published on 10 August 2010
Another interesting post from Joel York at Chaotic Flow about Product Marketing Strategy in the SaaS world. Upgrade or Upsell, or both ?
I think it would be hard to overemphasize the importance of upgrades and upsells in SaaS product marketing. In an industry where free trials, freemium versions, bargain basement subscription prices and simply hoping to recover customer acquisition cost with first year revenue are the norm, few things are sweeter than a customer that actually wants to spend MORE money with you. Upgrades and upsells can lead to orders of magnitude difference in SaaS financial metrics. If you can acquire customers at $100/mo and rapidly upgrade them to $1,000/mo, then you may be able turn a profit in one year instead of ten years. And. if those $1,000/mo customers have a lifetime value of $100,000 instead of $10,000, then you may also turn a $50million SaaS company valuation into a $500million SaaS company valuation. 'Nuff said.
Hunting is not just for acquiring new customers.
If an existing SaaS customer has a value gap
that can be closed by an upgrade or upsell,
then you should hunt it down and sell it.
Upgrade vs. Upsell in SaaS
Although the terms upsell and upgrade are often used interchangeable, I personally use them to distinguish between two very specific SaaS product marketing scenarios. For the purposes of this discussion, I will use the following definitions:
Upgrade : Higher revenue from increased usage of current SaaS product capabilities.
Upsell : Higher revenue from new SaaS product capabilities.
The reason for my distinction is that the buying dynamic is very different for the two scenarios. Upgrade potential of a SaaS product depends on the customer's need to increase consumption of a known solution to a known problem, and deepens commitment to a particular capability. Whereas upsell potential of a SaaS product depends on the customer's need to find new solutions to new problems, and widens your SaaS product footprint. This is not to say that upgrades and upsells are completely independent, because the need for increased usage can be highly correlated to the need for new capabilities as a growing customer's business often entails greater volume as well as greater complexity.
Measure Value, Not Use
When SaaS product marketers think of upgrades and upsells, their minds immediately turn to pricing and packaging. Pricing and packaging are important, but you should always keep in mind that they are just a means to an end: purchase. The most important principle to follow in designing your SaaS product offering is to align pricing and packaging with customer value, or in B2B sales lingo "customer pain," because the more a customer values a particular capability of your SaaS product, the more a customer will pay for it. In order to price what the market will bear, you must package your SaaS product into value bundles and price them using the measures that most closely correlate to customer value. You can use features, users, usage, performance, or any measure you like to price and package your SaaS product into bundles, but never forget that these measures serve as surrogates for customer value. A hundred bucks might buy you one feature or one hundred, but if that bundle of features doesn't equate to value, your customers won't pay it, or worse they might pay for it and still feel cheated or manipulated in the process.
Bundle Purchase Scenarios, Not Features
While customer value is the proper measure of your SaaS product bundles, it won't tell you where to draw the pricing and packaging lines between your subscription plans. Some customers may place high value on pretty charts, while others may not value them all. The customer of a help desk SaaS product may value the first ten support rep users considerably more than the next fifty sales users. The first month's use of a tax computation SaaS product may be significantly more valuable than use for the rest of the year. Competition may drive the margin for email features to zero, while unique social media capabilities may garner a premium.
The goal of any SaaS product pricing and packaging strategy is to maximize total profit by dividing it up into separate profit streams that add up to more than the profit of a single SaaS product offered at a single price. This is accomplished by segmenting the market into purchase scenarios of various customer groups and then further segmenting the stream of purchases of a single customer over time (upselling and upgrades!). More simply, you should bundle purchase scenarios, not features. OK, enough of the pricing 101. Let's talk about how to drive upgrades and upsells.
Open The Front Door Wide
You can't upgrade or upsell if you don't have a customer, so it is critical to make it as easy as possible to adopt your SaaS product. Customer's will come to you with varying degrees of sophistication and immediate need, so make sure you have an entry level offering that services the lowest, most common rung on the ladder. You may not wish to spend a lot of time and money on these customers in the beginning, especially if you have a freemium strategy. But, trial and purchase are merely the first steps to a long and profitable customer relationship when upgrades and upsells drive customer lifetime value well above that of the initial purchase.
Grow With Your Customers
If your customer only has ten salespeople, you will have a hard time upgrading your sales automation SaaS product to twenty users. If your customer has just launched it's new website using your content management SaaS product, then advanced BI of usage statistics might be a tough sell. However, as your customer expands both its business and its understanding of your SaaS product, its need for greater usage and greater capability will expand as well. Therefore, you should map out the growth path your customer's needs and align it with increasing SaaS product value. When your SaaS product value bundles and prices align with your customers' growth trajectory, they will upgrade naturally, painlessly and frequently of their own accord, feeling that you have served them well and delivered what they need in return for a fair price.
Design For Discovery
Aligning value with need is a two way street. Your customer must have the need, but it must also see the value, and not necessarily in that order. You should design your SaaS product so that your customer naturally discovers and digests new capabilities just-in-time as its needs grow. Done well, this not only maximizes upgrades and upsells, it streamlines usability and simplifies adoption. There is nothing worse than being clobbered over the head with hundreds of features and options, when you only need and understand one. Or, being charged for stuff that you simply don't need.
Read more on the original post here