Your SaaS business has established great product-market fit and has built a strong and growing base of subscription customers—well done!
Now it’s time to look at how you can really maximize your revenue—specifically, your annual recurring revenue (ARR).
Well, as your product develops you could raise the price. By locking in higher annual contract values (ACVs), you can achieve a higher ARR while servicing the same number of customers.
This is the strategy WordPress hosting provider Kinsta adopted when it was founded in 2013.
Web hosting businesses are a dime a dozen, and Kinsta knew it didn’t want to be “just another cheap hosting company providing low-quality services for a few dollars per month.”
So, it went the other way and charged at least $30 per month for its services—by contrast, web hosting can cost as low as $0.99 per month.
But of course, the business didn’t charge higher prices just for the sake of doing so. It justified its higher-than-standard price point by offering exceptional features, such as fast load times and top-notch customer service.
To date, Kinsta has thousands of customers that pay a premium price for premium offerings. This also helped the business bootstrap itself from a zero to seven-figure ARR in just four years.
Of course, charging more for quality features is just one way of maximizing your ARR based on your ACV.
1. Offer a freemium product to grow your ARR
On the other hand, what about setting your ACV at—wait for it—zero dollars?
Hear me out.
People love free stuff. If you let them test-drive a freemium version of your product, they might just sign up for a paid plan if your product is of value to them.
And if your product becomes even more valuable with more people using it, then offering a freemium version becomes an even better option.
This is exactly how Zoom managed to stand out in a highly saturated virtual communications market—years before COVID-19 made its video conferencing product mainstream.
“In our case, we really want to get the customers to test our product,” CEO of Zoom, Eric Yuan, shared during a 2017 interview on how the business reached the $100 million ARR-mark.
We make our freemium product work so well. We give [away] most of our features for free and one to one is no limitation [...] If they like our product, very soon they are going to pay for the subscription.”
And of course, when customers use a service like this, they aren’t using it on their own—they’re also looping in others in their network. This is essentially leveraging your customers to generate new leads.
Before Zoom went public in 2019, 55% of its 344 customers that had contributed more than $100,000 revenue for the fiscal year ending January 31, 2019 had used its freemium product before converting.
2. Grow your ARR upmarket
Then there’s the opposite of going downmarket to increase your ARR: you can increase your ARR by going upmarket. Specifically, by adding an enterprise version of your product.
File-sharing platform Box knows all about this.
Growth was steady after the business started up in the B2C market in 2005. But one of its co-founders, Aaron Levie, wasn’t satisfied.
He had big dreams for Box and wasn’t sure if staying focused on B2C would help the business get there.
The fact that other competitors—Apple, Flickr, and even the then-called “Google Drive” killer, Dropbox—were entering the cloud storage market wasn’t helping either.
Although Levie didn’t know much about the enterprise market, he knew it was time for Box to go enterprise, or be overtaken by the competition.
This move didn’t mean abandoning the user-friendly features that made Box so well-loved by consumers though. The business deployed these features in its enterprise offering as well.
It also raised its price from $2.99 per month to $15 per user per month.
At that time, Microsoft SharePoint was the leading player in the enterprise file-sharing market and it had serious flaws. So, when Box entered the enterprise market with its easy-to-use product in 2007, it took the enterprise world by storm.
From 2008 to 2009, Box experienced 500% revenue growth. And to date, it now powers 69% of Fortune 500 companies, according to the business’s website.
3. Localize your prices
Chances are you offer your product in U.S. dollars. However, most countries obviously don’t use the U.S. dollar as their native currency.
So if you’re looking to raise your ARR by acquiring more customers from abroad, it may be a good idea to localize (or tailor) your prices to suit local markets.
Email marketing platform Litmus credits this strategy for helping it grow in its early stages of business.
At that time, it had been charging for its product in euros—even to U.S. users, which formed around 75% of the business’s target market.
But when Litmus started charging U.S. users in U.S. dollars instead of in euros, the business gained a 5X increase in conversions.
From Litmus CEO Paul Farnell’s point of view, it wasn’t that U.S. prospects didn’t trust the business. It was just that perhaps they “didn’t feel comfortable paying for a product in a different currency.”
Apart from changing the currency of your prices, what about changing the price amounts themselves for certain markets?
Given the general strength of the U.S. dollar, your product could be simply unaffordable to potential customers in countries with a lower purchasing power.
If you were to lower your ACV for those markets, you may get more customers from these markets, while everyone else pays your standard U.S.-dollar price—thereby maximizing your total ARR.
4. Provide more value—for the same ACV
So far, we’ve talked about playing with your ACV numbers to maximize ARR. But here’s a different idea.
Keep your prices the same.
But on top of that, deliver more value to your customers—whether in terms of new features or entirely new products. This way, you stand to gain new customers while keeping your existing ones for as long as possible.
This approach has served marketing platform HubSpot very well.
Although HubSpot’s Q4 2020 ACV is about the same as its Q4 2019 ACV—around $9,700—the business grew its customer base by 42% over that same period.
It also hit an ARR of $1 billion.
“Typically, somebody who's like a 300-person company and has been with us since they're 30 and they're heading to 3,000, [there are] a lot of times to graduate there,” commented HubSpot co-founder and CEO Brian Halligan during the business’s Q4 2020 earnings call.
“I just think the power we've added to the platform is really paying off, and people are sticking around longer and enjoying the new sophisticated feature footprint now.”
What will your ACV strategy for higher ARR look like?
Here’s what all this means for your SaaS business.
When it comes to maximizing your ARR based on your ACV, setting higher prices is the obvious way to do it—especially if you’re adding premium features or going upmarket.
But sometimes, lowering your prices may be the way to go instead. This could be if you’re going down-market or trying to build out your customer base by adding lower-income segments.
Or perhaps it makes the most sense to focus on expanding and retaining your customer base by providing more value at the same price point.
There’s more than one way of tackling this challenge, and you won’t know which is the best way—or ways—for your business until you give it a shot.
Ultimately, having the catalog flexibility to play around with your SaaS business’s pricing strategy can be a huge competitive advantage in terms of finding landing on the right ACV to maximize your ARR.