Bend the curve with Average Contract Value (ACV)

Nov28, 2016

SaaS entrepreneurs know how hard it is to scale their companies from zero to their first few $M in revenue. I’ve posted before about misconceptions about scaling SaaS businesses – namely that adding more sales pods will lead to exponential growth. While pod additions are part of it, the single most powerful lever in driving exponential growth of a SaaS business is increasing Average Contract Value (ACV). I’ll assume for this article that ACV also equals annual contract value.

The other day our team was reviewing portfolio performance, and I nearly fell off my chair when I saw the power of ACV in the chart below (scale, years and a few data points adjusted to protect the innocent):

SaaS startup example revenue and customer growth

pic-1

While after Q2 2013, monthly customer growth of this company stays relatively constant on average (meaning customer count grows linearly), revenue is a hockey stick. Why? Incredible gains in ACV of new customers.

The chart below distills this in more detail. In fact, below, monthly customer additions do increase but go up only a bit more than 2x from a relatively steady average of ~7 in 2013 to ~16 in 2014. However, new ACV grows from $5K in the early days to nearly $25K in the most recent months shown, a 5x increase. WOW!

New customers and ACV per monthpic 2.png

For those of you who like calculus, the 2x and 5x represent multipliers in a sort of second derivative of the ARR revenue level – the change in the change that bends the curve. In other words, over a period of a few years, the company is adding 2x * 5x = 10x per month more in ARR than it did early on. Yet it is doing this while only adding twice the number of customers per month than it used to. Assuming sales people remain as efficient from a # of customers per month perspective, the company is doing all this with only a 2x the size sales force. In fact, this company added more sales people than that because higher ACV also comes with somewhat longer sales cycles and higher levels of support. However, even if sales person deal efficiency is half of what it was, overall ARR efficiency of the sales force is still up 5x * 50% = 2.5x. I would invest in that all day and night.

So how did they do this? (you can do it too)

Mature your product (fast): A SaaS MVP usually lacks integrations, enterprise functionality and other controls and features – just enough for small to medium size businesses to find value in. To increase ACV, you need to give something to get something.

Who are the key adjacent software players in your ecosystem? More importantly, with which ones have your early customers expressed a desire for integration? Then there are the common MB and enterprise asks: single sign on, administrative controls, reporting, etc. Once you integrate a few key adjacent platforms and basic enterprise functionality, you suddenly have a means other than number of seats/users to drive price. Want Salesforce integration with SSO? Sure, that’s our “pro” version for 2x the price.

You don’t get what you don’t ask for: Early on, the startup game is about getting a few customers, any customers. You don’t really care what your early customers pay. Often they are friendlies and have agreed to iterate with you on product and feedback, so you’re fine with giving them a deal. Unfortunately, this can anchor you and your sales team to bargain pricing. While being conscious of competitor and comp pricing in your space, take off the gloves and ask for more. You need to prove that you can do this for yourself and your sales team. If your ACV is $10K when you hire your 4th, 5th and 6th sales rep, it’s likely to stay that way until you prove to them it can be higher. The only way to break the habit is to land some higher ACV sales yourself – as a company leader – and set a new precedent. You will both show your sales team that it can be done and get mad props.

Puff up your fur with killer marketing: Animals puff their fur in a fight to make themselves look bigger. Smart startups do this too. Our best SaaS companies are spending surprisingly large parts of their budgets on sponsoring key industry conferences. It’s how you look bigger than you are, help customers overcome startup aversion and grease the sales skid with name recognition.

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