The SaaS Growth Formula to Rule Them All

Driving exponential growth is the goal of every B2B SaaS company and its investors.

The classic goal is to hit $100M ARR in just five short years after reaching product market fit (PMF).

Investing in SaaS is a high risk venture with a high rate of startup failure (over 90%, according to Failory!). Company leadership has to make the right decisions that will lead to extended, rapid style growth and a path to profitability.

T2D3 is an mnemonic that SaaS guru Stijn Hendrikse uses to break down the components of this crushing growth expectation:

T2D3 =

Two years in a row where (annual recurring revenue) ARR triples
+
Three years in a row where ARR doubles

If you can do that, you can reach $100M in five years. This incredible revenue growth power of SaaS is why investors keep investing more despite the high failure rate.

This T2D3 growth rate is a big ask for any company to achieve! 

If it can be done, investors will line up to be a part of it. If it can’t be done, it is likely the startup is on a road to eventual failure. 

The good news is, the task of creating more growth for your B2B SaaS company can be broken down into five distinct areas your team can tackle right away. 

As a fractional CMO, I often start discovery with new clients with a talk about these five growth factors and how they are performing. Inevitably, the answers founders give me quickly lead to the right questions and a path forward to more growth.

The Founder’s Challenge: Growing More With Less

80% of the small businesses in the US employ just the founder, according to the National Association for the Self-Employed. 

In this way, founders are no strangers to the idea of doing more with less. Less time, less resources, less money – no problem! They blast through those challenges.

Early stage companies that serve their early customers well eventually reach the point of developing the product that clients pay and stay for, and then the need for rapid growth begins. According to Statista, the main challenge to the success of a startup is generating new business. That’s when a fractional CMO can step in and be helpful.

Even if the company is more established, it is surprising how much growth can be accomplished without the need for a full-time chief marketing officer. With a fractional on board in leadership, this means your company is saving hundreds of thousands on salary and benefits. This leaves more cash available for investing in good campaigns.

In late 2023, The Wall Street Journal said “Silicon Valley has learned a long-lasting lesson: how to do more with less… it’s a new era for an industry that in years past grew with little restraint, one in which companies are focusing on efficiency and acting more like their corporate peers that emphasize shareholder value and healthy margins.”

Has your company learned this lesson? Is there low hanging fruit to be plucked to optimize your existing growth methods and find efficiency all over your growth apparatus? Have you considered how better to balance your people costs vs your media campaign resources?

It’s a great exercise to consider. 

The T2D3 Formula Explained

The levers of growth are easy to understand and evaluate at a high level, if you have good data and an expert to help interpret the signals. 

To get T2D3 growth happening at your SaaS company, there are three main areas to focus on:

  1. Scaling your demand generation and new customer flow with efficiency
  2. Delighting and keeping more existing customers
  3. Increasing the amount each customer spends

There is a formula for this (see below), but consider T2D3 more a “formula for success” than a strict formula with a numerical output. 

The T2D3 formula is about understanding the relationship between the five levers of growth. You can see clearly that all of these marketing elements need to be functioning well – in parallel – for the company to succeed in exponential growth.

The T2D3 Formula is expressed as follows:

( (MQL / CAC) x Conversion Rate % x ARPU ) / Churn

Take a look at each of these areas in turn and think… are these factors improving, or declining? Which is in most urgent need of attention?

The Five Levers of B2B SaaS Growth

To succeed in driving T2D3 growth and hitting $100M in five years, SaaS companies need to balance their efforts around five growth levers. None can be neglected.

The five levers of B2B SaaS Growth are:

  1. MQL: How many qualified leads do we generate? 
  2. CAC: How much does it cost, on average, to attract and land each new customer?
  3. Conversion Rate %: How likely is it that a qualified lead will convert to a customer?
  4. ARPU: How much does each customer spend?
  5. Churn: How long do clients stay as paying customers, on average?

Unfortunately, hitting the mark on 3 or 4 out of 5 areas is not enough. 

Think of it like a plate of food balanced on a stick. If one area is neglected, the whole plate will fall over.

I find many founders breathe a sigh of relief when they see the T2D3 formula laid out and they begin talking with me about their startup’s experience in these areas. There are always low hanging fruit to tackle right away, and other deep ideas that take time to implement. The direction must always move forward.

Let’s take a look at each one of these five SaaS growth factors in turn: 

1. MQLs (Marketing Qualified Leads)

A MQL, or Marketing Qualified Lead, is a potential customer who has shown a level of interest in a product or service based on your marketing efforts. 

Every company defines these a little differently, using criteria such as engagement with content, email signup, website visits, or interactions with marketing campaigns. 

MQLs are more likely to convert into customers vs general leads, because they’ve “raised their hand” and made themselves known to the marketing team. They are typically handed over to the sales team for nurturing and conversion strategy.

NEGATIVE INDICATORS

  • We’re getting less leads
  • We’re getting more leads but they are poor quality

POSITIVE INDICATORS

  • We’re getting more leads with consistent/better quality

Why Your B2B SaaS Company Isn’t Getting Enough MQLs

Software companies can struggle to generate more Marketing Qualified Leads (MQLs) into the sales bucket, just when they need them most.

If your SaaS company isn’t getting enough MQLs or the quality is poor, this could be why:

  1. Poorly Defined Target Audience
    Take another look at how you’ve defined your target audience and identified the ideal customer profile. With bad targeting, marketing efforts won’t reach those who will benefit most from the software.
  2. Product-Market Fit Issues
    If your software product doesn’t align well with the needs and preferences of a specific target market, it will struggle to attract MQLS and convert them.
  3. Limited Market and Competitor Research
    A lack of thorough market research can lead to misunderstandings about the competitive landscape and true customer needs, resulting in a product that doesn’t resonate.
  4. Poor Content Marketing
    If the content produced by your software company doesn’t authentically educate and address key pain points of your target audience, it won’t land MQLs. If it fails to provide value, it won’t attract the right leads.
  5. Lack of Multichannel Approach: Marketing is holistic, so relying solely on one marketing channel will limit exposure. A diversified approach, including content marketing, social media, email campaigns and paid advertising, is more effective.
  6. A Boring Website: A poorly designed or outdated website will deter potential leads. A clean, user-friendly website with clear messaging, visible trust signal and effective calls-to-action is better.
  7. Limited SEO Optimization: If your website is not optimized for search engines like Google and Bing, potential customers will have difficulty finding it. SEO strategies focused on dominating a few critical keywords that bring customers should be always moving to improve online visibility.
  8. Unclear Value Proposition: If the software company’s value proposition is not clearly communicated, potential leads may not understand the benefits of the product.
  9. Ineffective Positioning: Failing to position the software as a solution to specific problems faced by the target audience can hinder lead generation.
  10. Starved Budget: Limited marketing budgets may restrict the implementation of comprehensive marketing strategies.
  11. Understaffed Team: Insufficient personnel dedicated to marketing efforts can lead to overwhelmed teams and reduced effectiveness. This is where a fractional CMO can be a gamechanger!
  12. Competition Is Winning: In a crowded software market, intense competition may make it challenging to stand out. Software companies need to differentiate themselves through unique value propositions and effective marketing. What is your beachhead?

With the help of a fractional expert, your software company can conduct a thorough audit of your marketing strategies, audience targeting, and product-market fit. There are always low-hanging fruit to grab right away that make an immediate difference, as well as longer-term initiatives to be launched.

Continuous optimization based on data-driven insights and customer feedback is key to improving MQL generation over time.

2. CAC (Customer Acquisition Cost)

Customer Acquisition Cost (CAC) is the average cost a business incurs to acquire a new customer. 

CAC is calculated by dividing the total costs associated with acquiring customers (including marketing, sales, and other expenses) by the number of customers acquired during a specific period. 

A CAC that is trending down indicates that a business is acquiring customers at a more cost-effective rate, contributing to better overall profitability. You can read more about CAC and how to improve it here.

NEGATIVE INDICATORS

  • Our leads are costing more over time
  • Our leads are consistent in cost but falling in quality

POSITIVE INDICATORS

  • We’re getting a consistent flow of leads with falling cost
  • We’re getting more leads at a consistent/better cost

Why SaaS Companies See CAC Rise

Experiencing an increase in Customer Acquisition Cost (CAC) is always vexing, unless it is expected.

Sometimes, leadership makes a deliberate decision to let CAC rise temporarily because of specific investments they are making in new campaign tests or marketing channels. But this metric needs to hold steady or move down over time for the company ultimately to succeed in hitting T2D3.

You’ll notice a number of the items below would fall into the category of “not my fault” and that’s fair.

However, at the end of the day you are still responsible for keeping CAC under control. This might mean a “dolphin strategy” when economic conditions make customers harder to land or developing new markets when your original market gets saturated with competitors

If you are seeing CAC rise at your SaaS company, see if one or more of these reason might be driving the issue:

  1. Increased Competition or Market Saturation
    As a software market becomes more saturated with competitors, companies need to invest more in marketing and sales efforts to stand out and acquire customers.
  2. Expanding Target Markets
    When a software company expands into new geographic regions or targets additional customer segments, it can face higher costs associated with entering and establishing a presence.
  3. Rising Advertising Costs
    Increased demand for advertising space on platforms such as Google Ads and social media can lead to higher costs per click (CPC) or impression (CPM), contributing to a rise in overall CAC.
  4. Longer Sales Cycles
    Software solutions with complex features or longer sales cycles require additional resources for educating and convincing potential customers, resulting in higher CAC.
  1. New Feature Development
    Investing in the development of new and advanced features can increase the overall cost of acquiring customers, especially if the enhanced features require additional marketing and sales efforts to explain.
  2. Shift to Higher-Cost Channels
    Changes in the marketing channel mix, such as a shift toward more expensive channels, can impact CAC. For example, if a company moves from organic traffic to paid advertising, costs will increase.
  3. Ineffective Marketing with Low Conversion Rates
    Ineffective marketing strategies that lead to low conversion rates result in higher CAC. If a significant portion of acquired leads don’t convert into customers, the cost per acquired customer increases.
  1. Rapid Growth Scaling
    Scaling marketing and sales efforts quickly can drive up CAC, especially if processes and strategies are not optimized for efficiency.
  2. High Churn Rates
    If a software company struggles with customer retention and experiences high churn rates, the cost of acquiring new customers to replace those lost will contribute to a rise in CAC.
  3. Evolving Industry Landscape
    Changes in the industry landscape, such as shifts in customer behavior, technological advancements, or regulatory changes, can mean big adjustments in marketing strategies, potentially leading to higher CAC.
  1. Inflation and Economic Factors
    General economic conditions, inflation, and changes in currency values can impact the costs associated with marketing and sales efforts, influencing CAC.

Keep an eye on CAC over time and try to segment your CAC readings out as much as possible to understand which marketing efforts bring the lowest CAC over time, in aggregate. Most companies have a mix of expensive efforts that bring the biggest, best customers and lower-cost, automated strategies that bring earlier-stage, less convertible leads but are still profitable.

Continuous monitoring on your live data dashboard and rapid adjustment are the way to maintaining a healthy balance between customer acquisition costs and the value you get from your acquired customers.

3. Conversion Rate %:

For the purposes of this exercise, Conversion Rate % measures the percentage of marketing quality leads who become customers. However, it is also used more granularly to see how well stages of the funnel convert a prospect to the next action, such as making a purchase, filling out a form, or subscribing to a service. 

Conversion Rate % is calculated by dividing the number of conversions by the total number of visitors or leads and multiplying by 100. A higher conversion rate indicates that a higher proportion of the audience is taking the intended action. This means the market is rewarding your marketing and sales efforts and driving the outcomes you want.

NEGATIVE INDICATORS

  • Traffic levels are consistent, but conversion rate % is falling
  • Traffic is rising but conversion rate % is falling

POSITIVE INDICATORS

  • Traffic is consistent, and conversion rate % is rising
  • Traffic is rising and conversion rate % is rising

Why is the conversion rate % at my B2B SaaS company falling?

A crater in your conversion rate doesn’t have to be crushing, but you need to address it right now.

Here are potential reasons why the conversion rate is falling for your company:

  1. Mismatched Target Audience
    If your marketing efforts are not effectively reaching or resonating with your target audience, the conversion rate may suffer. Review and refine your buyer personas to ensure alignment with your actual customer base.
  2. Lousy Website User Experience: If your website or landing pages are not user-friendly, have slow load times, or lack clear calls-to-action, visitors may be discouraged from converting. Landing pages simply break for no good reason, suddenly. Optimize for a seamless user experience and always be testing to make sure no “wheels have fallen off the bus.” It is also wise to set alerts if a particular CTA hasn’t produced a click or lead recently – that could be a sign of something gone wrong technically.
  1. “Snooze” Messaging
    If your content does not effectively communicate the value proposition of your SaaS product or fails to address customer pain points, visitors may not see the relevance of converting. Make sure you speak to clear pain points, provide clear solutions and keep it emotionally engaging.
  1. Increased Competition
    A more competitive market will make it challenging to stand out. Evaluate the competitive landscape and ensure that your differentiation is clear in your marketing materials. Consider how you might focus on a specific part of a hot market (“specialize”) or move to a related market where there is less awareness of your product niche as well as your competitors.
  1. Changes in Marketing Channel Performance
    If you’ve recently shifted marketing efforts to new channels or altered the mix, assess the performance of each channel to identify if there are any underperforming areas affecting conversion rates.
  2. Product-Market Fit Misalignment
    If there is a disconnect between your product offerings and the actual needs of your target customers, conversion rates may decline. Regularly assess and adjust your product-market fit.
  3. Too-Long Sales Cycle
    A complex or lengthy sales cycle contributes to a decline in conversion rates. Review and streamline your sales process to address potential bottlenecks and improve efficiency.
  1. Lack of Trust Signals
    Insufficient trust signals on your website, such as customer testimonials, case studies, or security certifications, impacts conversion rates. Build credibility through transparent and authentic messaging.
  1. Negative Economic Conditions
    External economic factors or industry shifts impacts purchasing behavior all the time. Stay informed about external influences and adjust your strategies accordingly.
  1. Seasonal Variations
    B2B buying behavior almost always exhibits seasonal trends. If there are cyclical patterns in your industry, adjust your marketing strategies to align with these patterns.
  1. Insufficient Data Analysis
    Regularly analyze data to identify trends and patterns. Use tools like Google Analytics to understand user behavior on your website and make data-driven optimizations.
  1. Lack of A/B Testing and Experimentation
    Implement A/B testing and experimentation to assess the impact of changes on conversion rates. Test different elements such as headlines, CTAs, and page layouts to identify what resonates best with your audience.
  1. Not Enough Customer Feedback
    Collect and analyze feedback from customers who did not convert. Understand their concerns or objections and use this information to refine your messaging and offerings.

By systematically evaluating these potential factors, you can identify the specific issues affecting your conversion rate. Then, you can develop targeted strategies to address them. 

Regular monitoring and adjustments based on data-driven insights are key to maintaining and improving conversion rates over time.

4. ARPU (Average Revenue Per User)

Average Revenue Per User (ARPU) calculates the average revenue generated by a software company for each user or customer within a specific time period. 

ARPU is calculated by dividing total revenue by the number of users or customers. ARPU is valuable in assessing the financial performance and sustainability of a customer base. 

Software companies seek to increase ARPU through strategies such as upselling, cross-selling, and introducing premium services to maximize revenue from each customer.

NEGATIVE INDICATORS

  • Customer count is rising, but customers are spending less over time
  • Customer count is rising, but customers spend the same year after year

POSITIVE INDICATORS

  • Customer count is rising and customers spend more over time with you

Why isn’t my ARPU increasing over time?

Happy customers not only stick around, but they are willing to accept price increases as time goes by. It is understandable that there might be reluctance to raise prices on your customers when you need to minimize churn.

However, the company needs to evolve over time and keep growing the amount each customer spends. It is a critical leg of the “5 legged stool” of SaaS growth.

If your ARPU isn’t increasing over time, see which of these items might be holding you back:

  1. Lack of Pricing Adjustments
    If you haven’t adjusted your pricing strategy to reflect the value provided by your product or to match market conditions, it may hinder ARPU growth. Over time, you should be able to raise your prices without losing customers, because they are getting more value over time and are increasingly dependent upon your solution. Don’t be afraid to raise prices if you are giving more value!
  2. Ineffective Segmentation

If your customer segmentation is not precise, you might not be targeting high-value customer segments effectively. Consider refining your segmentation to focus on customers with higher revenue potential.

  1. Limited Upselling Opportunities
    If you are not actively promoting and executing upselling strategies, you may miss opportunities to encourage existing customers to upgrade to higher-tier plans or purchase additional features.
  1. High Churn Rates: If customer churn is high, acquiring new customers to replace those lost can be expensive and impact ARPU. Focus on customer retention strategies to reduce churn and retain high-value customers.
  1. Low Customer Satisfaction
    Dissatisfied customers may not see the value in upgrading or purchasing additional services. Prioritize customer satisfaction and address any issues promptly to retain and upsell to existing customers.
  1. Increased Competition
    A more competitive market may limit your ability to increase prices or upsell. Assess the competitive landscape and ensure your offerings remain competitive while delivering superior value.
  1. Unmet Market Demand
    If your product does not align with evolving market demands or lacks features customers are seeking, it can impact ARPU growth. Stay informed about market trends and adapt your product accordingly.
  1. Economic Factors
    Economic downturns or uncertainties can affect customer budgets and willingness to spend. Consider adjusting your strategies based on the economic conditions in your target markets.
  1. Not Enough Cross-Selling
    If you offer a suite of products or services, explore cross-selling opportunities to encourage customers to use additional offerings, increasing overall revenue per user.
  1. Insufficient Data Analysis Behind Decision Making
    Regularly analyze customer data to identify trends and patterns. Use data-driven insights to inform decisions about pricing, feature enhancements, and customer engagement strategies.
  1. Weak Marketing Campaigns
    If marketing efforts are not effectively communicating the value proposition of premium plans or additional services, customers may not be motivated to upgrade. Optimize marketing campaigns to highlight benefits.
  1. Limited Customer Education
    Ensure that customers are aware of the full range of features and services you offer. Invest in customer education programs to highlight the value they can derive from higher-tier plans.
  1. Inflexible Subscription Models
    If your subscription models are too rigid and don’t allow for customization based on customer needs, you could be looking for trouble. Consider offering more flexible plans to cater to varying requirements.

It is always a worthwhile exercise to gather your leadership team to identify opportunities for ARPU growth. I also suggest an “open door” policy for employees to present new ideas to grow ARPU and serve the existing customers more deeply with more value.

Engage with your customers, gather feedback, and stay agile in adapting your strategies to align with customer needs and market dynamics. Sustainable ARPU growth involves a combination of pricing optimization, effective customer engagement, and strategic upselling and cross-selling. Go for it!

5. Churn %

Nobody wants to see churn rate rise – that’s not a good sign at all. While it isn’t always under your control, the solutions can be!

Churn is the rate at which subscription customers discontinue their use of your product or service during a given period. It is the golden key to assessing customer retention and loyalty. 

Churn is expressed as a percentage and is calculated by dividing the number of customers lost during a specific time period by the total number of customers at the beginning of that period. 

Minimizing churn is essential for sustaining business growth. Retaining existing customers is more cost-effective than acquiring new ones. 

Strategies to reduce churn include improving customer satisfaction, providing excellent customer support, and addressing reasons for customer attrition.

NEGATIVE INDICATORS

  • The average amount of months each customer stays as a customer is falling
  • The average amount of months each customer stays as a customer is staying the same

POSITIVE INDICATORS

  • The average amount of months each customer stays as a customer is increasing over time

Why do my SaaS customers keep churning?

Churn is frustrating and sometimes scary to witness from the inside. The hope is that you’ll serve customers well and provide the value they expect at an efficient cost, so they’ll stay forever. But this isn’t always the case. 

Here are common reasons why SaaS customers churn:

  1. Misalignment of Expectations
    If customers perceive that the actual value delivered by your SaaS product does not align with their initial expectations, they can become dissatisfied and bail.
  1. Poor User Experience and Usability Issues
    If your SaaS platform has a steep learning curve, frequent glitches, or lacks user-friendly features, customers will find it challenging to use and opt for alternatives with a less wack user experience.
  1. Better Competitor Options
    If competitors offer similar or superior solutions at a more competitive price, with additional features, or improved customer support, customers may switch to those alternatives.
  1. Cost Sensitivity
    Customers will churn if they perceive your SaaS pricing as too high relative to the value they receive. Regularly reassess your pricing strategy and provide transparent communication about the value proposition you offer.
  1. Inadequate Customer Support
    Poor customer support, slow response times, or ineffective issue resolution can lead to anger and dissatisfaction. Even one well-crafted poor review can strike your SaaS reputation like a lightning bolt. Ensure you have a responsive and helpful support team to address customer concerns promptly. Update your FAQs and help videos regularly.
  1. Missing or Lagging Features
    If your SaaS product lacks critical features or fails to keep up with industry standards, customers will look for alternatives that better meet their needs.
  1. Limited Scalability
    Customers may outgrow your SaaS solution or find that it lacks the scalability to accommodate their expanding requirements. Offer scalable solutions that can grow with your customers’ business.
  1. Unfavorable Contract Terms
    Customers may be dissatisfied with contract terms, renewal conditions, or cancellation policies. Ensure transparent and customer-friendly contract terms to build trust. Ask for feedback about contracts and how they could work better to keep clients happy and receiving what they expect.
  1. Lack of Authentic Communication
    If customers feel neglected or uninformed about updates, improvements, or changes to your SaaS offering, they will assume you’ve stagnated. Markets move quickly and shiny new objects can pop up in the form of new competitors. Don’t let your customers seek more innovative solutions elsewhere.
  1. Integration Woes
    If your SaaS product has difficulties integrating with other tools and systems, it will hinder customers’ workflow. It may even lead to instant termination of the contract.  Lack of easy integration is a key point of dissatisfaction with software.
  1. Data Security Issues
    Security breaches or concerns about data privacy will erode trust overnight. Prioritize robust security measures and communicate them clearly to assure customers of their data’s safety. If there is an issue, be transparent and communicative immediately to keep your clients’ trust.
  1. Shift in Business Focus and Requirements
    Customers may churn due to changes in their business focus, industry dynamics, or strategic priorities. While this may be out of your control, regularly engage with customers to understand their evolving needs. There might be your next big business opportunity to be found there!
  1. Inactive Usage and Low Engagement
    If customers are not actively using your SaaS product, they will inevitably question its value. Proactively engage with customers to understand their usage patterns and provide targeted support. Get them using the software!
  1. Disappointing Onboarding Process
    If the onboarding process is not smooth or fails to showcase the value of your SaaS product, customers will be disappointed and much more likely to churn. If a customer can’t get the full value of the software because they don’t understand it properly, they will definitely churn. 

Think about conducting customer feedback surveys, analyzing user behavior, and more closely monitoring customer interactions. This way, you can gain insights into the specific reasons for unneeded churn in your SaaS business. 

Then you are ready to implement targeted improvements, enhance customer satisfaction, and build long-term customer relationships.

Use the T2D3 Formula to Drive New Growth Efficiently

To reach $100M in just five years, a B2B SaaS company must triple revenue for two consecutive years, and then double revenue for the next three years.

You can do it too!

Consider what you observe in the data about the flow rate of leads, the cost to get customers, the conversion rate into customers, the amount each customer spends, and how long it takes a customer to churn. 

These data will provide clues to the lowest-hanging fruit you can pluck for your business. A fractional CMO can help with strategies like these: 

  • Introducing your successful product to a new market
  • Getting leads more efficiently through a specific platform like Googe Search Ads
  • Increasing conversion with better messaging and targeting
  • Showing more value to customers with nurturing to make room for price increases
  • Providing sales acceleration to get more tight coordination between marketing efforts and sales results

Inspect what you expect and you’ll find the right answer to rapid growth.

https://snohat.com

Founder, Fractional CMO