Expansions and renewals is a lever of growth that has historically been a little ignored in software GTM motions. Yet, for companies that have a strong customer base, it is a growth lever that is worth its weight in gold.
Price Intelligently includes in one of its blogs that (original data from a Pacific Crest Securities SaaS Survey) on average upsells and renewals have substantially lower (upto a 4th) CAC (Customer Acquisition Costs) as compared to new customer acquisition (see Figure 1).
Fig. 1: Impact of expansions and renewals on customer acquisition costs
This point was further driven home by one of Patrick Campell’s presentations on the importance of monetization (see Figure 2). His research revealed that a 1% increase in monetization caused the most significant increase in profits.
Fig. 2: Impact of monetization on profits
This is a critically important point for companies with an established customer base, be they single product or multi-product companies.
The problem is GTM teams (primarily Marketing and Sales) have historically not been very well structured to prospect seamlessly into existing customers, though this is changing. This is complicated by the fact that at any given time some customers are happy and some are not, with the Customer Success (CS).team usually gatekeeping the relationship.
In bigger organizations, there are also ‘Account Manager’, i.e. “farmer”, counterparts to New Business “hunters”. Even so, the upsell process is by its nature different. In many cases upsells happen as a natural consequence of increased needs as compared to a multi-channel marketing push for awareness.
That being said, the point of raising this topic is to make sure it is tackled with seriousness and a different lens given the potential impact this lever has on revenue and profit growth.
Below I provide a table of things you need to either design for, or even consider as mini-projects of their own to really make sure your pricing model works with expansions and renewals:
Area
Considerations
Package Design
Caution on being too rigid
A common approach to good–better–best packaging is to bundle in all possible features within confined package tiers in the name of simplicity and deal velocity (too rigid). In some cases this can be a mistake. If you bundle in features that have been traditionally upsold or that lie unused as shelfware once a deal is sold, you’ve potentially blocked downstream upsell opportunities since going forward new prospects will already have these features as a part of their package. (This problem is also articulated by Johnny Cheng later in the book and borne out by his experience at Gainsight.)
Treat existing customers as special
Often applying the same rules to existing customers as new customers can result in difficult expansion and renewal conversations, especially if existing customers have historically been given special treatment (lower rates, more services, etc.). You may want to consider creating special upsell bundles or a granular feature menu only for current customers to buy from, in order to ease natural upsell transitions, instead of creating all‑or‑nothing propositions which current customers may shy away from.
If your customer base broadly has a singular package that was sold historically, and you are now introducing graded packages then it might not make sense to make customers upgrade to the most elite tier before they can buy the add‑on applicable for that tier, because in most cases the upgrade + add‑on cost will preclude the upsell from even happening in the first place. This is where a special upsell feature menu might help.
If your customer base is especially large in size, e.g. in companies >$100M ARR, you could also consider mapping customer sizes to the new graded plans and providing an incentive to move to the new plans (often a higher discount or deferred payment). If the pricing change is at a place where you are compelled to make this a company‑wide change with customer migrations, then it will undoubtedly become its own project and should be treated as such — and not part of the initial pricing rollout.
Beware of cannibalization
A few types of pricing changes can introduce cannibalization risk:
Responses to commoditization, requiring companies to create premium differentiated offerings but reducing the prices for existing plans
Trying to enter downmarket segment to increase market share with price competitive plans
Selling the same product via channel partners at heavily discounted, almost ‘wholesale’, prices
In each of these cases, and especially where you will publicly broadcast new packages or plans on your website, existing customers are bound to look for a better deal thereby churning out of higher‑margin plans. To avoid this fate, package design must be done very carefully allowing for graded differentiation between existing plans and also thinking about nomenclature and service offerings differently. Customers will be less likely to want to downgrade if they think the new plan is different from what they have and that their current product + service offering is a better fit. (Later in the book, Jan Pasternak shares some of his best practices to deal with this situation from his experiences at Citrix, hint even naming them differently helps.)
Price Points
List price conundrums
In the majority of pricing and packaging revamps, one of the key overarching goals is often to increase product ASP (Average Selling Price). Some new packages may be created to capture greater value and others to capture market share. This often makes sense with the broader market in mind, but can be problematic for existing customers during renewal time.
Existing customers who have a substantial amount of functionality, and who were sold on a prior package might need to upgrade to a ‘premium’ plan where the list price could be 2–3× higher than what they pay for their solution today. Offering customers these new plans at the new list prices may lead them to balk.
On the other hand, customers who use only lightweight features but who still pay a reasonable average unit price could be getting a much better deal with the lower end packages created to incentivize market share. This may not go down well with leadership who thought the pricing revamp would actually increase ASPs, not reduce them.
These list price conundrums can be solved in a few different ways:
Providing higher discounts for existing customers
Creating different list prices for new packages for existing customers
Creating explicit, no‑downgrade policies where existing customers will not be shown a lower list price than what they already pay
While option B could be cleaner, it might be resisted by your finance team which will want you to have consistent value for your product SKUs. The tactics deployed will be completely situation specific.
Volume/Usage Upsell
Contracts, instrumentation and business process
Volume upsells are an element of pricing that is often missed in the early stages of a company’s GTM, only to later realize the usage of the product by existing customers has increased multifold but that the original contract either did not have language to cap usage or charge for overages, and more often than not the product isn’t instrumented properly to meter usage. Not all companies face this challenge, but many do.
When revamping the pricing model, it is then critical to think about overage pricing that incentivizes clients to move into higher value product tiers, as well as internal mechanisms to flag an upsell motion when an account has significantly exceeded usage expectations.
Furthermore, explicit language must now be put into new client and renewal contracts that makes the usage clauses clear with an agreed‑upon overage rate. Not having this language is bound to cause pain where every renewal opportunity becomes a challenging negotiation, increasing churn risk and forgoing potential revenue at the same time.
Cross‑sells
Incentivize clients to be loyal
It is the refrain of many single‑product companies that go against behemoths such as Salesforce or Zendesk that even though they have competitive product offerings both in terms of features and price, the larger company is able to close multi‑product deals by providing steep discounts to keep their clients locked into their own ecosystems.
You must do that same with cross‑sells. As long as an opportunity is a product fit with a client’s need, it is advisable to offer special discounts and payment terms to existing clients such that it makes little sense for them to even bother running a competitive RFP.
As a pricing leader, it would be advisable to proactively create a distinct discounting and approval process for cross‑sells that is distinct from your new business deal closure process.
A final note on the dynamics of who your key stakeholder will be in this process. It is less likely to be the VP of Sales and you must equally cater to the VP of Customer Success for these policies to succeed. Quoting Tom Tonguz:
“As a maturing SaaS company approaches 50% of revenue generated from renewals, customer success should rise in strategic importance to the business. After all, customer success generates half of the company’s revenue. In addition, as the startup develops new products and/or capacity to expand accounts, the customer success team new bookings also becomes a material consideration. And the VP of CS contributes as much revenue as the VPS.”
Bundling
Bundling is often considered a 'silver bullet' in the SaaS industry, seen as an easy way to drive revenue and decrease churn by encouraging multi-product purchasing. By offering multiple products or features together at a discounted rate, companies can increase the perceived value of their offerings, making it more difficult for customers to switch to competitors. This strategy not only enhances customer loyalty but also boosts average revenue per user (ARPU) by promoting the adoption of additional services that customers might not have purchased individually.
However, while bundling can be highly effective, it also has its disadvantages. One major drawback is the potential for customers to feel overwhelmed by the number of features they receive, many of which they may not need or use. This can lead to dissatisfaction and the perception that they are paying for unnecessary extras. Additionally, bundling can complicate the product offering, making it harder for customers to understand the value proposition of each individual component. From a business perspective, bundling can also reduce flexibility in pricing and limit the company’s ability to upsell or cross-sell specific products in the future.
Therefore, while bundling can be a powerful tool for driving growth and reducing churn, it must be carefully designed to ensure it aligns with customer needs and does not inadvertently create complexity or reduce the perceived value of individual products.
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