Long-Term Revenue Growth Is Harder Than Short-Term Revenue Growth

Hiya guys!

Patrick (patio11) here. You're getting this not-quite-weekly email because you asked to receive my advice on making and selling software. I'm starting to figure out a writing rhythm which works for me, so it actually might be weekly going forward.

[Edit: Actually, it's possible that you've never gotten an email from me. Somebody might have just given you the link to this page, which is an online archive of an email that I sent to folks who had asked for it. If you'd like to get articles like this in your inbox, totally free, about once a week or two, give me your email address.]

If you could wave a magic wand to do one thing for software companies, most would ask for more top line revenue. This is true of bootstrappers, startups, and established companies with $20 million a year in revenue. The parameters bounce around a bit but the need is, broadly speaking, the same.

Growth isn't just a number, though, it is a rate, which implies that there is a time dimension. It turns out that the tactics which generate short-term revenue growth (today, tomorrow, the next few months) and the strategies which generate long-term revenue growth are different.

I once told Hiten Shah that "Short-term revenue growth comes from your customers. Long-term revenue growth comes from new customers." The truth is probably a little more nuanced than that. Short-term revenue growth comes from optimizing a system which is already working: an existing product with existing customers, an existing marketing channel and existing sales strategy, yadda yadda yadda. Long-term revenue growth largely comes from building systems which don't exist yet.

Long-Term Strategies To Accelerate Revenue Growth

We might call the long-term goal acceleration of revenue growth, actually. You could get additional velocity of revenue just by keeping the working system working, since the long-term is just the short-term iterated a sufficiently high number of times. This is probably the default fate of software companies -- the "Long Slow SaaS Ramp of Death" -- where you get modest growth but not the fabled hockey stick. (Do me a favor: if you haven't seen that, by Gail Goodman about how she and the team built Constant Contact, bookmark it. You'll want to clear an hour from your schedule and watch it, when your mind is clear and you're in the mood to take copious notes. It's the best presentation I've ever seen about building software companies.)

Expanding Into New Channels

A channel is, broadly speaking, a way of connecting you to people who can be convinced to buy your software. For example, low-touch sales with customer acquisition via organic SEO is one channel which is near and dear to my heart. That certainly isn't the only way to build a business, though.

Appointment Reminder originally got (well, to be honest, continues to get) the overwhelming majority of its leads through organic SEO. I planned it from the beginning to do this, partly because I thought that the channel made sense for the business and partly because I have a comparative advantage in organic SEO. (Translation: it was easy for me to implement and didn't require stretching in scary directions like "Cold calling hospitals and asking to speak to their executives." or "Attending industry tradeshows and pressing the flesh.")

Another possible channel for selling software is via resellers white labeled software. (Under the hood, it is your software, but it carries the visible branding of the reseller or their client.) This is most viable for software which is adjacent to an active consulting market, because consultants often have pre-existing commercial relationships with customers and a burning need for recurring revenue.

For example, Visual Website Optimizer solves a problem for conversion rate optimization consultants, so they frequently bring VWO business (by buying accounts for their clients or white labeling VWO to sell it to clients). While I personally just told my clients to buy a VWO account for themselves, many consultancies would prefer to have their name on the solution which generates lots of customer-visible value, so white labeling is pretty attractive to them.

It took me two years before Appointment Reminder's white label program amounted to more than a hill of beans. Partly this was because it was my first rodeo on white labeling, and I had to learn how to e.g. manage relations with telecom consultancies and encourage them to actually sell AR. Partly this was because my most successful white label partners took their sweet time in spinning up their businesses.

Either way, quite recently, the AR white label program went from "A distraction which I'm regretting that I spent time implementing and should probably close to new accounts" to "One of the most important sources of growth in 2013." Believe me, it did not feel nearly so good when I was sowing the seeds for that back in 2011.

White label arrangements are often vastly more successful when, in addition to directly allowing your resellers to charge clients for your software, they also grease the wheels of additional commerce between your resellers and their clients. A particular sweet spot is where the product enables services revenue or vice versa, via just happening to be something that they can tack onto existing relationships.

There are, of course, many other channels to explore:

  • Trade shows
  • High-touch sales via, e.g., inside sales teams
  • Content marketing
  • Integration marketing (Rob Walling reports that this was one of the first big wins for growing HitTail, allowing him to borrow pre-existing audiences from firms with complimentary products and sell to them)
  • Radio ("What?!" Yeah, I thought that, too. Seriously, go watch Gail's presentation.)
  • Training seminars, either online or in-person (Watch Gail's presentation to see how Constant Contact scaled "We send out an employee to talk to 40 doctors, real estate brokers, and chefs about email... and barely even mention our product, which by the way costs $35 a month." It's sheer genius.)

You'll likely fail to make a dent on many channels, and possibly even fail multiple times on an individual channel, prior to discovering the right combination of factors which make it work for your business. The beautiful thing is that when you do find a scalable channel, the effects can be transformative.

Change Your Packaging Options

"Packaging" is an industry term of art for what features get included in the various product options you have on sale. You can think of it as basically the strategic decision behind your four column SaaS grid -- both what the columns include (pricing, quota numbers, names, etc) and, often as importantly, what rows you include to use as segmentation axes.

A large SaaS company reported privately that the most important thing they ever did was test packaging, religiously. They had someone to do nothing other than play around with how many plans they offered, what they included, and what they were priced at. Those tests (A/B testing, cohort testing, and qualitative testing with individual customers) were apparently "orders of magnitude more effective" than all other forms of testing they did.

It took years to understand their customers as well as they do now, but the current packaging options generate over 100X in customer LTV versus similar amounts/sources of traffic when they started several years ago.

Warning: you need to be running at a high level of sophistication and scale to execute on cohort testing. Ballpark: you'd want $10 million a year in sales and a full-time employee to manage it. You can certainly change plans/pricing/etc before that, but doing it in a very rigorous fashion is hard.

Micro-tip: One of the easiest flavors of switching up packaging is to think hard about what is in your top-most plan. (At many companies it is Unlimited, which is very rarely a good idea, because it is so difficult to one-up Unlimited in the future.)

If there is a numerical quota associated with your top plan, keep a careful ear open for questions like "What happens if we exceed the quota?" or "Can you accommodate $NUMBER $UNITS per month?" Many customers will not even think to ask these, so hearing this feedback at all tends to suggest that is the tip of the iceberg for a source of demand that you aren't currently meeting. You can often harvest that demand by adding a new top plan. This was the single most dramatic thing for monthly revenue Appointment Reminder ever did, and that's feedback I've heard from many companies.

If you don't have the "Increment a number a bit and put a new name on it" option available, consider adding a new feature which segments the customer base. For example, Code Climate added their Security Monitor product to the top plans (simultaneously justifying a substantial price increase, since that almost changes the character of the product). Beanstalk also did something similar -- after finding out that many customers getting hugely different value from the product had similar usage of their quotas, they added business-focused features which they could use to hang their hat on exclusive packaging options aimed at the corporate market.

A funny story there: by the time I was consulting for Wildbit, the company that made Beanstalk, the sentiment internally was that "Beanstalk" and "Beanstalk Plus" was a suboptimal framing these days. The corporate segment was rather more lucrative, so we worked at reframing the product into "Beanstalk" -- the base offering now being the featureful one for corporate users, rather than the first thing they had released years ago -- and "Beanstalk Lite", an affordable entry point into Beanstalk for freelancers. This change in emphasis marks the things built for corporate use as core features of the product rather than some bells and whistles which might be nice to have.

Just because your company had a particular user archetype be your wheelhouse as of launch day doesn't necessarily mean that they'll be your core audience forever. You should periodically think whether your core audience has perhaps shifted, and if so, it might be the time to reframe what you're doing.

Build More Products

You've solved one problem for your clients. Great. It is highly unlikely that you've exhausted either their entire budget or the entire universe of problems they have. So, solve more problems.

If there is one strategic inefficiency in my business, it is that my products target such disparate groups of customers. (I knew that would be a problem, but felt I had no choice given that I had no desire to ever make another B2C product for teachers after Bingo Card Creator. Going forward I'll be smarter about doing line extensions which are totally orthogonal to my existing customer base and/or audience.)

You don't have to make products which exactly target your existing market or customers, by the way. Sometimes it is useful to grow in one dimension while keeping the Venn diagram overlap pretty extensive in others. You might, for example, stay in the same industry but cover a band of customer sophistication which overlaps your existing one but is not co-extensive with it.

For example, if you make software for development shops from freelancers through teams of dozens, your second product might solve a different pain-point but be squarely aimed at teams small through large but below the enterprise category. You could sell this product immediately to 80% of your (most valuable) customers, but also have additional growth possibilities at a tier of customer you haven't successfully addressed yet. In addition to creating revenue growth this exposes you to new challenges, which is one of the things I like most about running a business.

Short Term Tactics To Increase Revenue Growth

Raise Your Prices

I bang on this drum a lot, but it's a good drum. Most software is underpriced. Many, many, MANY software companies pick prices somewhat arbitrarily and let them stay at that level for too long, even as the product improves and the other parts of their business (marketing initiatives, acquiring more desirable customers, etc) start to fall into place.

Raising prices on existing customers is difficult. Raising prices on new customers, on the other hand, is trivial logistically. I've seen companies implement it in under 30 minutes after arguing internally about maybe, possibly doing it someday... for 30 months.

It's ridiculous how effective this is. I'm aware of one company which increased its MRR (monthly recurring revenue) by about 15% in a day just by announcing an upcoming price increase. They told their customers that they were going to grandfather in anybody at their existing rates as of a week from the announcement. Many of their customers upgraded on the spot. Why? Doing so locked in their pricing for the next tier, which would have been sharply more expensive if they waited "until they needed it."

Grandfathering in existing customers on rate increases is largely considered SaaS best practice, by the way. As time goes on, new customers outnumber existing customers, so average revenue per user will approach the pricing you're extending to new customers. Unless you have compelling reasons (like high marginal costs, systemically unsustainable pricing, or the possibility of business failure if you don't raise cash now), I generally suggest grandfathering in older customers. It rewards them for their support of you early on, and creates passionate loyalists for the company. (This isn't a law of nature. Most businesses we deal with bake routine rate increases into our expectations. That's not unethical, it's just not particularly something I would suggest absent a good reason to do it.)

Sell More To The Same Customers

It's hoary old wisdom in the marketing/sales community that it's 7 times less expensive to acquire new business from an old customer than to acquire a new customer. That sounds suspiciously like a fable to me. What I've actually seen, over and over again, is that software companies which make it possible for existing clients to buy more stuff sell more stuff very easily.

Examples of this can include:

Product bundles. Let's hypothetically say you sell two related software products, which could be used by the same customers. (If you do, you're smarter than me, since I have one thing for elementary school teachers, another for small services firms, and another for SaaS companies.) You can offer both of those things together for a very slight discount, either at the time of sale or as a special offer to existing customers. (Send them an email, drop them an in-app notification, or give them a personal phone call from the founder/sales team, depending on your goals and unit economics.)

This prints money, particularly because most SaaS companies have incredibly good gross margins and the lion's share of costs is incurred before someone becomes a customer rather than after. It has properties which are very similar to a price increase, but customers perceive that they're getting a deal (the value of the 2nd product, at a discount to it's normal price).

Offering upgrades. Many SaaS businesses will tell you that accounts do not self-upgrade to higher plan levels very frequently. There is a huge inertia effect unless they're acted upon by an outside force. Your outside force can be a small nudge, like an email asking whether they want more "headroom" (God, that word is unreasonably effective in B2B sales) combined with a modest discount. It costs you effectively nothing to ask for this and, assuming you don't do it every Thursday, can get quite meaningful increases in revenue.

Anecdote: I was delivering an unrelated engagement at a software company once, and we had wrapped up for the day at 4:30 PM. Rather than clocking out early I suggested we do a quick SQL query, find everyone over 80% of their plan quota, and gently suggest upgrading to the next plan just so that they would never find their work interrupted by running out of quota. (Time investment? Minutes. Results? Thousands in recurring revenue, last I heard, and they systemized this email after our experiment proved it worked.)

Optimize All The Things

Much of my success in selling software, and in generating big wins for consulting clients, was in conversion optimization. It is easy to execute on, relatively inexpensive, and has minimal execution risk... and, assuming you're operating at scale, you can get feedback from it very, very quickly. (At Google scales, on the order of minutes. At my scale or your scale, probably on the order of days or weeks, depending on a few factors. Very much the short-term more than the long-term.)

Conversion optimization is also an interesting straddle between short-term and long-term growth drivers. On the one hand, it can generate quick wins. On the other hand, doing it right can teach you things about your customers which inform longer-term strategies.

I've been doing some fun new work on conversion optimization recently, and can't wait to show you some of what we've done. (Naturally, to the maximum extent possible, it will be what, why, and how it worked out.)

You'll be hearing a lot from me about this topic over the next few weeks. I'm on the fence about whether to do:

1) Focus totally on conversion optimization advice (including some announcements about a product I have in the works in this space) for the next several weeks

2) Continue choosing topics eclectically and ask anyone who wants to receive concentrated conversion optimization goodness to affirmatively ask for those emails.

If you have a strong opinion about this, drop me an email. As always, you can just reply -- I read almost everything and try to get back to most of it.

Until next time.


Patrick McKenzie

P.S. Are you on the new version of Gmail with multiple tabs? You can drag this email from its current tab to your main inbox, which will tell Google that you'd like them to auto-sort these emails that way in the future.

P.P.S. Your final reminder from me: If you're a consultant and you want to attend the workshop on building recurring revenue that Brennan Dunn and I are holding this August 8th, go sign up for it now.