For every successful SaaS company that has grown over 50% year over year — including such well-known companies as Zendesk, Box, Hubspot, and New Relic — there are thousands of startups that have failed.
In fact, according to a recent McKinsey study Grow Fast or Die Slow,
“IF A SOFTWARE COMPANY GROWS LESS THAN 20% ANNUALLY, THERE IS A 92% CHANCE OF FAILURE.”
— McKinsey, Grow Fast or Die Slow
When you’re a startup, it’s fairly easy to double revenues in a month (for example, going from $10K to $20K). As you start to grow, you can expect to double revenue in a quarter, then in a year. But as you get larger, it’s very, very difficult to double your revenues in these same time frames — after all, how many companies grow from $50M to $100M in one month?
So how can SaaS companies grow, grow fast, grow efficiently, and keep growing?
In working with hundreds of SaaS companies, we’ve learned that the solution to sustaining a high growth rate is to diversify your approach to growth and embrace multiple growth strategies.
We’ve boiled it down to the top 10 essential growth strategies: this article highlights the third – Expand with a Cross-Sell Strategy.
EXPAND WITH A CROSS-SELL STRATEGY
WHILE UPSELLING AND CROSS-SELLING ARE SOMETIMES CONFLATED, THEY ARE REALLY TWO DISTINCT SEPARATE GROWTH STRATEGIES.
While upselling is a strategy designed to sell a more feature rich (and expensive) product edition to an existing customer, cross-selling is a strategy designed to sell additional products to an existing customer (to provide a more comprehensive solution).
According to a recent SaaS Radar report by McKinsey & Company and Gainsight, of later stage SaaS companies (with revenue in the $25-75M range), companies that had the lowest churn were those that cross-sold multiple products to about one-third of their customers. The takeaway is pretty clear: The ability to solve for a broad range of customer problems, with a broad range of solutions, increases retention.
Cross-selling provides an impetus for innovation. SaaS companies that want the ability to cross sell need to be continuously innovating, adding new products, features, functionality, and offerings to entice customers to add on to their plans.
STAR EXAMPLE: NEW RELIC
New Relic, a leading digital intelligence company, is a great example of a SaaS company that has grown very quickly, in large part due to its cross-sell strategy.
New Relic is known for their awesome products, with a huge base of devoted developers. They build on this fan base and drive retention through bottom-up adoption of their products. In other words, rather than marketing solely to leadership, they connect directly with developers, providing a wide range of easy-to-deploy products and additional features that solve very real pain points.
New Relic has wisely recognized that to optimize growth, they need to go outside of just being an APM (application performance management) offering. As New Relic founder and CEO Lew Cirne has said “We’d love New Relic to be for the IT management market what Salesforce is to sales and CRM.”
“We’d love New Relic to be for the IT management market what Salesforce is to sales and CRM.”
— Lew Cirne, New Relic founder and CEO
Towards this end, they’ve been successful for a number of years now: As far back as their FQ4/15 earnings report, 20% of new recurring revenue came from non-core products, approximately 15% of their customers were paying for more than just one product, and multi-product customers (that is, customers who pay for more than just one product) increased by more than 400%.
They did this by offering every product as a monthly. Any developer can pay a small fee to try out an add-on product without a big commitment. This significantly drives cross-sells.
And this strategy continues to drive revenue: as of March 2020, New Relic reported annual recurring revenue of $636 million. Per their earnings report, the company said that about 75% of its ARR was from paid business accounts worth more than $100,000.
By diversifying their product line and focusing on cross-selling to their devoted base, New Relic is not only increasing earnings per customer and thus overall revenue, but is also poised to grab a larger share of the global IT operations and service management software (ITOSM) market — with the ITOSM market size projected to reach USD 7177.6 million by 2026, from USD 6863.5 million in 2020, at a CAGR of 4.2%% during 2021-2026.
TO EFFECTIVELY CROSS-SELL, SAAS BUSINESSES NEED THE ABILITY TO:
1. Track customer behavioral (what they do in the product) and financial (what they’re paying) information to understand customer needs and uncover new add-on opportunities
2. Guide the sales team to target specific customers for specific add-on offerings
3. Offer creative pricing strategies (e.g. in New Relic’s case, a shorter billing frequency) to incentivize cross-sells