The Overlooked Opportunity : Successfully Designing Pricing for Upsells and Expansion

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As a company that serves the needs of the Subscription Economy, we are privileged to have a ringside view into the creative ways in which hundreds of business leaders are looking to monetize their products and services.

But there’s another dimension to this that makes this topic even more compelling for Zuora. We are a SaaS business ourselves.

We have always been passionate about discussing and sharing pricing/packaging observations and lessons we’ve learned from our work in implementing new pricing models for our customers within the Zuora product, as well as our own use of Zuora as the monetization engine for our company.

We have learned many lessons and observed many practices related to the realm of pricing and packaging recurring revenue services in the 8+ years that we have been in business.

Read on to learn more about one of the most important pieces of the pricing puzzle: designing for upsell growth.

Why Upsells and Expansion are important

Maintaining a healthy pace of upsell growth is important for any Subscription Economy business, and, for many businesses, upsell growth targets are an important point of discussion in boardrooms and with investors.

The importance of upsells is also evident from the recent SaaS survey conducted by Pacific Crest. The data shows that the median respondents are able to capture 15% of of new ACV from upsells and expansions. The data also shows that the cost to acquire $1 in upsell revenue is a mere 24% of the cost to acquire a new customer.

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Don’t Put Future Upsell Growth at Risk

In practice, many businesses, especially those making the transition from one-time to recurring revenue business models, are still driven by practices that prioritize customer acquisition in ways that potentially put future upsell growth at risk.

We see different practices that often put future upsell growth at risk in both the B2B and B2C worlds.

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  • In the B2B world, we often see that the pressure to meet new business quotas drives a higher rate of customer acquisition, but puts future net dollar retention growth at risk.
  • In the B2C world we often see the practice of what we call “blind” promotions, that tend to be very successful at acquiring new subscribers, but that result in a steep churn curve after the promotion is over. The reason that we call these “blind” promotions is that, often, marketing teams are unable to tailor these promotions, or the post-promotion conversion offers based on how subscribers are using the service during the promotion phase.

Critical to avoiding this pitfall is the ability for your teams to have great insights into how your subscribers are using your products/services, and to design your sales and marketing incentives to align not just with acquisition, but also with long-term growth and retention.

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Capability and Consumption Levers For Effective Pricing Design

Teams responsible for pricing and packaging at any company — whether B2B or B2C — should consider designing pricing and packaging in a way that allows for two key factors to drive upsells and expansion:

1. Capability-driven growth. These are packages that represent an expanded set of capabilities of your product or service that your customer/subscriber may require as their needs or their business expands. For example, if you sell a customer service application, the ability to send customer communications in multiple languages may only be required by more mature businesses, or businesses that expand to different geographies over time.

2. Consumption-driven growth. These are dimensions or units that represent a higher use or adoption of the same base set of capabilities by your customer. To follow the same example of the customer service application above, a business adding more users to the system over time, or storing more data would be examples of consumption-driven growth. In this case, your customers are using the same set of capabilities they started with, but just using more of it.

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We often see businesses only focus on one or the other. However, in the Subscription Economy your business will continue to innovate and deliver more value to your customers, and your customers will hopefully use more of your product over time.

This two-dimensional design approach ensures that your product innovation, as well as increased adoption by your customers, will both drive increased value and revenue for your customers and your business.

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