SaaS Growth Strategy #3: Cross-Selling for Increased Revenue and Retention

This is the third installment in our deep-dive series on the 10 core growth strategies for SaaS. You can read more about SaaS growth imperatives and download the free full guide here.

CROSS-SELL VS UPSELL

In our last growth strategy guide, we dug into growth strategy #2: building strategy upsell paths. While upselling and cross-selling are sometimes conflated, they are really two distinct separate growth strategies. Upselling is a strategy designed to sell a more feature rich (and expensive) product edition to an existing customer, whereas cross-selling is a strategy designed to sell additional products to an existing customer (to provide a more comprehensive solution).

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.

That innovation has a big payout: According to a recent SaaSRadar 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.

CROSS-SELLING AND RETENTION

The takeaway is pretty clear: The ability to solve for a broad range of customer problems, with a broad range of solutions, increases retention.

Additionally, according to the same report, cross-selling limits churn exposure by:

• Acting as a competitive differentiator, providing a more comprehensive solution than other companies with less robust product offerings.
• Providing an “in” across multiple functions because with a wide(r) variety of products, you can solve more business problems across an organization.
• Driving increased user count which increases the reach and stickiness of your offerings.

In order to successfully cross-sell, SaaS businesses need insight into the financial, behavioral, and demographic data of their subscribers. The ability to analyze usage patterns, subscriber preferences, and financial metrics are key to uncovering the kinds of cross-sell opportunities that lead to additional revenue and subscriber retention.

GROWTH IN ACTION: 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. In 2016, New Relic was ranked as one of the Fastest Growing Companies in North America on Deloitte’s 2016 Technology Fast 500 with 847% revenue growth between fiscal year 2012 and fiscal year 2015. And their annual revenue was $263.5 million, up 45 percent over the previous year.

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 through bottom-up adoption of their products. In other words, rather than focusing their marketing efforts directly on the top (i.e. leadership), they connect directly with developers, providing a wide range of easy-to-deploy products and additional features that solve very real pain points. This is a markedly different approach from many other SaaS companies, and one that has worked really well for New Relic.

New Relic Founder and CEO Lew Cirne has gone on record as noting that one of the keys to their early growth was obtaining references from thought leaders in their core market. Early on, New Relic established themselves as a leader in the Rails community which lead to endorsement from some key players. As Cirne said, “This kind of endorsement can’t be bought; it needs to be earned. It had amazing impact on our early traction.”

This reputation and loyalty is what powered New Relic’s bottom-up growth and what provided a platform for successful cross-selling of new products.

New Relic wisely recognized that to optimize growth, they needed to go outside of just being an APM (application performance management) offering and provide a more comprehensive suite of products. As Cirne has noted, “We’d love New Relic to be for the IT management market what Salesforce is to sales and CRM.”

Towards this end, they’ve been successful: According to 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%.

And, in their earnings report issued in November 2016, Cirne reported that “at the end of our second fiscal quarter, our base of customers spending more than one million dollars per year grew by over 100% year-over-year, and has increased more than tenfold since our IPO. And the number of New Relic customers spending more than $100,000 annually has grown almost threefold since our IPO.” New add-on products contributed greatly to this strong financial performance.

Another key to their success with cross-selling is their creative pricing, specifically around billing flexibility: they offer every product for a monthly subscription. These shorter billing frequencies significantly drive cross-sells because it’s more appealing to a developer to pay just a small fee to try out an add-on product without having to get approval from leadership for a big financial commitment to an annual subscription.

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 market share of the global IT management tools market (valued at approximately $18B by Gartner in 2013).

TAKEAWAYS

To effectively cross-sell, SaaS businesses need the ability to:

• 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
• Guide the sales team to target specific customers for specific add-on offerings
• Offer creative pricing strategies (e.g. in New Relic’s case, a shorter billing frequency) to incentivize cross-sells