Imagine you are a product manager of a high growth $150 million SaaS company. Your product accounts for over 70% of the company’s revenues. Two years ago your firm reached a $1 billion valuation by successfully executing Battery Venture’s infamous “Triple, Triple, Double, Double, Double” (Establish a great product-market fit: Get to $2 million in ARR. Triple to $6 million in ARR. Triple to $18 million. Double to $36 million in ARR. Double to $72 million. Double to $144 million.) This year the company’s total revenue is forecasted to be only 20% — a far cry from last year’s 200% growth. The CEO turns to you and says “What are we going to do about this? We need to post at least 40% revenue growth this year!” Once a product line grows above $100 million in revenue product managers run into the “Big Number Growth Problem”. It’s one thing to triple revenues from $2 million to $6 million. It’s another thing to find another $40 million. That’s what a big number revenue growth problem looks like. Fortunately there are a number of tactics that can be used to reduce the challenge.
After five years a $150 million revenue product is most likely in the early majority stage of the technology adoption life cycle. The days of 125% net dollar retention are long past. A five year old product can have a revenue retention rate of 80% to 90%. So if you have a goal of growing a $150 million product by 40%, you first have to fill the ‘hole’ caused by lost revenue. That could be anywhere from $6 million to $30 million.
There about 1.7 million Google search results for SaaS Revenue Retention Strategies. You can boil down these recommendations to seven basic tactics:
- Track Key Metrics About Customer Behavior
- Improve Customer Onboarding Experience
- Provide Excellent Customer Service
- Implement a Customer Success Team
- Consistently Deliver New Releases
- Increase Prices Judiciously
- Provide Incentives for Your Team Members
Losing customer revenue is to be expected. Customer bankruptcies, mergers/acquisitions, economic downturns, unplanned product outages, etc. are all events that are outside of a product managers control. But the impact of these events have to be dealt with proactively. Before you can begin your journey to new revenue growth you have to deal with the inevitable revenue attrition.
By the time a product reaches $100 million in annual revenues it has international customers. Oracle, for example, generated 45% of their $40 billion revenues outside of the United States in their most recent fiscal year. International expansion is not a short term solution to the product manager big number growth problem. It can take years for an American software company to establish effective and scalable international operations. There are significant benefits to meeting this challenge. International businesses have the same problems as American businesses. The processes an auto parts manufacturer in Detroit are very similar to those in Wolfsburg, Germany or Aichi, Japan. Serving international customers is a great way to grow revenues sustainably.
The first decision to be made is what geographies you want to expand to. The second decision is whether to have direct (company offices) or indirect (resellers/distributors) operations. Most American software firms choose to have direct operations in countries with major economies. Canada is usually first. Western Europe is usually the second choice (UK, Germany, Netherlands, France, Spain, Italy). Asia/Pacific is usually the third choice (Japan, Australia, Korea, China). Central/South America the Middle East/Africa and Eastern Europe are usually handled by resellers and distributors.
Establishing international operations is not a short term fix to revenue growth problems. There are significant operational challenges: forming a legal entity, registering with tax authorities, finding office space, hiring staff, etc. Transferring money to/from the international location and the United States can be challenging – like local language customer support. There are literally dozens of other issues that need to be addressed. Many companies choose a different path. They acquire what is known as a ‘platform’ company – a company that already has a strong international presence. They then add their products into the mix.
There is more to international revenues than just sales. You need to be able to provide local language customer support and professional services. Your products will need to be translated to the local languages. Right to left languages like Arabic and Hebrew can be especially challenging. Languages that require double byte character sets (Japanese, Chinese, etc.) can also introduce complexity into your product development.
Another strategy to solving the big number growth problem involves introducing add on products into your portfolio. Add on products let you sell more to your existing customer base. Many add on products are developed internally, others are acquired.
In 1998 I worked for a firm that offered Computer Aided Software Engineering tools — essentially code generation tools for mainframe, UNIX, & Windows applications. In the late 1990s the Internet was exploding and the demand for web applications was tremendous. Our products were geared to generate applications for mainframe CICS, Unix VT100, or Windows fat client applications. We were missing out on the Internet revolution. One of our senior research fellows came up with a product idea – a web service proxy generator. This tool allowed a customer to generate a web service interface to any application they had already created using our tools. This enabled them to Internet enable their entire application portfolio quickly and easily. The add-on sold for $100,000, with an 18% annual maintenance fee. In two years we sold it to 523 of our 923 enterprise customers. It enabled us to join the Internet revolution while leveraging our significant existing customer base.
Add on products can also come via acquisition. Some great examples include Google’s acquisition of YouTube, Facebook & WhatsApp, and Oracle & Tableau. For example, with the Tableau acquisition Salesforce was able to replace an internally developed analytics solution with a premium set of products that drove significant incremental revenue.
Partnering with another company to sell their product to your customers is one of the lowest risk strategies to solving your big number growth problem. Partnering with a third party can be a win-win for both of you. You can offer your customers more capabilities and the partner can benefit from more sales.
Partnering faces a number of challenges. Financials are first. When you partner with a company you split the revenues based on an agreed upon formula. 60% for you and 40% for them is a common arrangement. One issue a revenue split introduces is that when a sales person sells a $100K deal, they usually only get commission on your share of the revenues. So if they have to spend 150 hours to close a $100K deal, they will be more likely to focus on your core offerings where they can earn full commission. Another challenge is that you will have to invest in advance of major sales in training customer support, pre-sales, and professional services personnel in the partner’s technology. As Henken & Watenpaugh point out another challenge is that you will not own the IP or control the roadmap of the partner product. This may cause issues in the long term. On the plus side, profits from partner product sales can be higher than your own products. You will not incur the costs of developing and maintaining the product. To sell an effective partnering opportunity inside your company you need to get the consent and support of the entire organization. Almost any department can tank a deal if they believe it is not in their best interest.
Examples of SaaS companies with great partner programs include HubSpot, Salesforce.com, and NetSuite. All of these program drive significant revenue and profits for their companies. Partnering can also led to successful acquisitions as well.
Acquisitions are a major strategy for solving the big number growth problem. In 2021 ‘Inorganic Revenue Growth’ is treated almost the same as organic revenue growth. Acquisitions provide a way for a company to add significant revenue quickly.
Acquisitions are complicated. A product manager can pitch an acquisition candidate, but it is a difficult process. Check out Product Leaders Should Learn How to Pitch M&A Candidates to get an idea about what would be required. Acquisitions can take a long time. When Twilio acquired SendGrid in 2020 the process took almost 16 months and required over 60 meetings among the executives of both companies, boards of directors, investment bankers, and lawyers. You can see the entire chronology here in SendGrid’s proxy statement for the acquisition (pages 98 – 114).
For product managers not too familiar with acquisitions here are some resources that could be helpful:
- M&A Basics for Product Managers
- Product Leaders Should Learn How to Pitch M&A Candidates
- M&A Basics for Product Managers. Part I: Major Types of M&A
- M&A Basics for Product Managers. Part II: Roles & Responsibilities in M&A
- M&A Basics for Product Managers. Part III: M&A Process
- M&A Integration War Story
Partnering can lead to an acquisition. In 2010 I ran product management for a provider of enterprise scale workload management systems. We were approached by a Los Angeles based startup in the workload automation space. Workload automation solutions have two major components – a centralized job management system and software agents that ran on each server in a customer’s environment. My firm specialized in universal agents that ran on mainframes, UNIX/Linux servers, ISeries servers, and specialized servers for SAP. We did not offer a centralized job management solution – instead our agents could replace the agents for all of the leading job scheduling solutions – at a significantly reduced cost. The startup had recently lost a number of RFP competitions because they did not have a certified SAP agent. We quickly struck a deal for them to OEM our SAP agent. A few months later we decided to OEM their workload automation solution. Our technology was politely referred to as Late Majority. In reality it was in the Laggard stage of the technology adoption life cycle. By partnering with them we could offer a modern complete solution to our existing customer base.
After we had made some initial sales we asked them if they were interested in merging with us. The price they quoted us was about four time what we were willing and able to pay. We happily continued on with the partnership. About six months into our relationship we conducted a joint roadshow for our leading European customers. One night in Amsterdam after a particularly good meal and a few adult beverages my counterpart at the startup told me that they might have some flexibility on the acquisition price. They cut their ‘ask’ by over 60% and were willing to do a deal that had a cash and equity component. Six weeks later we closed the acquisition. The deal worked because we had already proven that our combined offering was selling to our customers. Both sides had a chance to get to know and trust each other from a marketing, sales, customer support, development, professional services, and finance perspective.
The big revenue growth problem is a good problem for a product manager to have. That means revenue has grown to a significant size, but you are faced with a major revenue growth challenge. There are many tactics you can employ to conquer the challenge. Some like revenue retention or partnership tactics can be acted on quickly. Others like add on products or acquisitions are longer term solutions. As Albert Einstein said ““The significant problems we have cannot be solved at the same level of thinking with which we created them.”
Also published on Medium.