Every company wants to make as much money as possible, right? But, sometimes making money doesn’t all stem from acquisition. Money-making opportunities may be right before your eyes, within your current pipeline. We call it revenue enhancement.
Before you assume you’re going to have to finagle your taxes or credits, we aren’t talking about the type of revenue enhancement that the government often refers to. I’ll explain.
What is revenue enhancement?
When you think “revenue enhancement” your mind may naturally wander to the government. That’s not incorrect because revenue enhancement is traditionally a term used by governments to raise taxes or lower deductions and credits, but it has a different meaning in business. In private businesses, revenue enhancement means boosting revenue from revenue channels you already have.
One way to unlock growth through revenue enhancement is with your pricing—something we know a thing or two about here at ProfitWell.
Why revenue enhancement is crucial for subscription businesses
Enhancing revenue will not only put more money in your company’s pocket, but it will also have a positive impact on other SaaS metrics—CAC, LTV, ARR, MRR, and more. I’ll unpack a few.
Higher customer lifetime value (LTV) is something all recurring revenue companies should be striving for. Customer LTV is the total dollar amount you’re likely to receive from an individual customer over the life of their account with your product.
You want customers to stay with your company for as long as possible and spend as much money as they can while they are with you. Revenue enhancement can help accomplish this. When you get customers to buy into upselling and cross selling (which I’ll break down further in a bit), you’re raising the LTV on each specific customer.
Less market penetration needed
Market penetration is the extent to which a product is recognized and bought by customers in a particular market. In the pricing world, when we hear “market penetration” we immediately think of “penetration pricing,” which is a tactic that helps companies gain footing in a new market by offering a significantly lower price than what people would expect to pay, as an effort to acquire customers faster.
While penetration pricing helps acquire customers quickly, it’s not the best long-term strategy because it’s difficult to build customer loyalty and requires you to raise prices quickly to grow the business.
Instead of spending resources on penetrating a new market and taking the risk of penetration pricing, revenue enhancement will help you refocus your efforts on existing customers.
Less customer acquisition costs
Customer acquisition cost is the total cost of sales and marketing efforts that are required to acquire a customer. High CAC can ruin a subscription business’ profits. Instead of spending ample time selling to new customers, enhance the existing revenue with current customers. CAC and LTV go hand in hand. You want your LTV to be high and your CAC to be low. Revenue enhancement helps achieve the best possible LTV: CAC ratio possible.
Higher MRR, ARR, and overall revenue
Monthly recurring revenue, or MRR, measures the total amount of predictable revenue that a company expects on a monthly basis. Annual recurring revenue, or ARR, is MRR times 12.
Higher MRR, ARR, and revenue can all come from performing revenue enhancement on your current customers. Let’s say you cross sell a $100 add on to 50 customers this year. That revenue enhancement gives you a $5,000 higher MRR, that’s a $60,000 increase in ARR from a cross or upsell.
Simple revenue enhancement strategies for subscription businesses
Now you know the importance of revenue enhancement, but how is it accomplished? Let’s walk through some simple revenue enhancement strategies.
1. Hook the team, sell the company
This strategy requires a bit of analysis. You should first examine your operating margin and gross profit margin (which should honestly be habitual). The highest-ranking numbers are the companies/teams you should be focusing on. Furthermore, think of the teams who love your products most. Is there another team within the company, or at a similar company who might also enjoy your product? Extending the olive branch a little farther will enhance revenue.
2. Consider a tiered pricing model
Restrategizing your pricing also has the potential to enhance revenue opportunities. One model that particularly paves the way for more revenue down the road is a tiered pricing model. With tiered pricing, SaaS companies offer two or more packages and a fixed set of features for a specific price. Each tier is tailored to meet the specific needs of a particular buyer persona.
Tiered pricing is effective because better persona targeting leads to higher conversions and maximum revenue. Having it laid out by levels makes it easy for customers to upgrade when they feel they’ve outgrown their current level.
Here is an example of tiered pricing via Shopify. The different levels containing different features are clearly mapped out.
3. Upsell to premium after 3/6/12 months
These next two points stem from a tiered pricing model. Are you seeing customers grow out of your basic product within a matter of months? Often, that’s the case and a tiered pricing model makes it easy to showcase more features.
Reach out to customers on the more basic plans and offer a tutorial or demo of a more premium product with additional features.
4. Cross sell to big teams
In addition to upselling, you can also cross-sell to seize more revenue. Big teams will often have needs that encompass more than your stand-alone product can handle. If 10 people are using your product at a company, set a time with the buyer for a demo on complementary products. Odds are, someone will want it.
5. Focus on high-margin customers
Finally, collect further data on who your low vs. high-margin customers are. You’re going to want to focus your efforts on the higher-margin users. Eliminating low-margin customers can lead to cost reduction and free up more time and resources that can be spent on customers who have the potential to spend more money on your products.
You handle sales, ProfitWell handles retention
Retention is the main contributing factor to revenue enhancement. You can’t focus on enhancing revenue channels if your current customers keep churning. Scary fact: our data proves you only recover three out of 10 customers whose payment fails.
Credit card failures are the largest single bucket of churn, but it’s totally preventable. However, you can increase your recovery rate automatically and pay only for performance. ProfitWell Retain combines world-class subscription expertise with algorithms that leverage millions of data points to win your customers back automatically using the industry’s highest recovery rate.