Software as a Science: Unlock Limitless Recurring Revenue Without Losing Control

by Dan Martell

The easier it is to start a company…the harder it’s going to be to grow it.

Your competitive advantage isn’t how you write your code. It’s how you serve your customers.

“You may think your business is unique…but trust me. It’s not.”1 NOAH KAGAN, founder and CEO of AppSumo and author of New York Times bestseller Million Dollar Weekend

When your company is adding and losing the same number of customers, you’ve hit your Growth Ceiling. And it sucks.

The first plateau (for most SaaS companies) usually pops up somewhere between $10,000 and $30,000 in MRR. And the only way through it is to stop brute-forcing growth and start taking a systematic approach to solving the math problem that is your SaaS company.

Your company is a math problem. And math problems have solutions.

“Most companies die from indigestion, not starvation.”

You can do the right thing in the wrong order and still fail. You can do a really great job solving a problem that’s not actually a problem. You can even “fix” the wrong thing and end up with a worse result than you would have had if you’d ignored it.

“All software companies taste like chicken. They’re selling different products, but 80% of what they do is pretty much the same.”

A Growth Ceiling is the point at which the number of customers coming in and the number of customers going out equalize—and

four key numbers from your business: Current Customers New Customers Per Month Monthly Churn Rate Monthly ARPA (Average Revenue Per Account)

When you’re at your Growth Ceiling, you mathematically cannot grow.

At its core, your SaaS business is just a highly emotional math problem.

The ego was definitely taking a hit—Matt and Jake couldn’t hide behind the excuses that we all try to use: My business is different. My product is complex. My customers ‘don’t get it.’

Your product might be unique. But your company is not.

My Growth Ceiling is in _________ months at ________ MRR.

Calcular

“A business without a path to profit isn’t a business, it’s a hobby.”3 JASON FRIED, co-founder and CEO of 37Signals and author of New York Times bestseller, Rework

If your SaaS company is losing half of its brand-new customers before their implementation period is over, you’ve got big problems. For one, your new customers should be the most excited—they’re getting the most attention, they’re excited about the product, and they should be fired up about the value they’re receiving. Second, when that many customers are leaving that frequently, they’re clearly unhappy, and unhappy people talk, and when unhappy people talk, your sales team ends up having to answer to more and more objections. Enter problem three: at that rate, you’ll churn right through the entire market—and ruin your reputation in the process.

Turns out, they were so focused on demolishing their numbers that they were closing software deals with customers who didn’t even own computers.

If your SaaS company is healthy, you’ve got 3 things happening: customers are coming in, customers are staying, and customers are buying even more from you after the initial sale.

Net-Negative Revenue Churn: Your expansion revenue (from existing customers becoming more valuable) outpaces your churned revenue (from existing customers leaving or downgrading their accounts).

Twilio’s net dollar retention has been between 130% and 140% since their IPO.

So, a lemonade stand converts customers. SaaS companies keep them. World-class SaaS companies increase their value over time. A lemonade stand has one goal: ACQUSITION. A decent SaaS company adds another: RETENTION. A world-class SaaS company adds a final one: EXPANSION.

As a recap, here are the only numbers you need to predict and graph exactly when your company will mathematically stop growing: Current Customers New Customers Per Month (ACQUISITION) Monthly Churn Rate (RETENTION) Monthly ARPA (EXPANSION)

The Three Levers of SaaS: ACQUSITION: Get More Customers RETENTION: Keep Customers Longer EXPANSION: Make Customers More Valuable over time

The reason that SaaS companies command these types of multiples is threefold. First, in a well-run SaaS business, the revenue shows up again and again, every month, for every customer that you bring in (as long as you do your job right and deliver ongoing value). Even better, there’s usually a decreasing amount of effort required to retain a customer after they’ve been around a while.5 Then, as the company keeps going, a world-class SaaS company gets to that Holy Grail—Net-Negative Revenue Churn, expanding ARPA6 on customers it already has.

No metrics are more important than customer retention and acquisition. Why? We need to know that customers rely on the companies we buy—year in and year out. We also want to know that more growth is possible, and that customers today are still choosing our companies over the other options.

From there, your job is to proactively serve the customer—monitor their usage, ensure that they’re getting continued value from the software…and make sure that they know about it.

Success begins after the sale.

You can do the right things in the wrong order and still lose. Sequencing = Success

most acquirers are going to place a higher valuation on a company that’s great at retaining revenue vs. one that’s churning through a ton of sales—even if they have the same top-line revenue numbers. Ask anyone who has been through due diligence to sell their company (we’ve done it five times)—revenue retention is a major part of the conversation.

You could achieve this relatively modest increase in ARPA by tweaking your plan limits (known as feature fencing), introducing add-on features, services, or a host of other options.

In 2023, Shopify generated almost 3 times as much revenue9 from merchant services as they did from software subscriptions.

In the example we’ve worked on in this chapter, our assessment as business coaches would be to focus first on fixing retention, and then re-evaluate to make a decision on increasing sales vs. increasing customer value (based on how much we think we could move each needle and how much effort it would take).

You only have three levers: There are only three ways to grow your company—you can Get More Customers, Keep Customers Longer, and Make Customers More Valuable. That’s it.

Success begins after the sale: For a well-built SaaS company, most of the financial opportunity lies in RETENTION and EXPANSION after the sale. You can look to the industry titans as examples of this (Twilio and Shopify were our two examples, but there are tons). Building a large customer base and making them more valuable over time is the way to grow your enterprise value.

Sequencing = success: You can do the right things in the wrong order and still lose. When you’re deciding which part of the Hourglass to work on next, run three scenarios and see which one will drive the biggest ROI.

softwarebook.com/levers

“Marketing is a game of attention. You have to be able to play the game.”11 DAVE GERHARDT, CEO of Exit Five and former vice-president of marketing at Drift

There are two critical parts of your company’s growth engine: Your marketing channels (plural) Your marketing funnel (singular, usually)

Channels and funnels are the foundation of your entire marketing operation.

Marketing channels generate net-new attention. Marketing funnels convert (some of) that attention into leads and customers.

Marketing channels are where you invest time and money to generate attention in return.

A marketing funnel converts the attention into leads and customers. A well-designed funnel engages with prospects wherever they are in their buyer’s journey and helps nurture and educate them until they’re ready to become your customer.