When your business is growing, it’s easy to get lulled into a false sense of security. Everything seems good on paper. You’re bringing in more and more business and growing in customers and revenue every month. And if a little bit is spilling out of the pot each month, who cares?
But the truth is, if you’re leaking revenue anywhere, you’re the captain of a sinking ship.
It’s easier to focus on acquisition than optimization because, well, user acquisition is exciting. Adding new customers seems like the very definition of growth while making sure you’re getting the most value from your current users is secondary.
But as your company grows, leaving those tiny holes unattended can have dire consequences. As Andreessen Horowitz general partner and former Head of Growth at Uber, Andrew Chen explains in his essay Growth is getting hard:
“It used to be that startups could count on their competitors to be big, dumb, and slow. Not anymore. We’ve all gotten smarter and faster, and that includes your competitors.”
Being efficient and smart with how you run your company is one of the fastest ways to beat the competition. And identifying and plugging places where you’re leaking revenue is an easy and impactful place to start.
The top 9 places your SaaS company is leaking revenue (and how to solve them)
It’s hard to find numbers around revenue leakage, but some stats claim up to 5% of your MRR can be lost to certain types of leakage. Which means 5-figures or more depending on the value of your customers.
Leaking revenue is a serious issue. And not just for your bottom line. Often revenue leaks are symptoms of a bigger issue—one that could cause you to start seriously churning customers and revenue.
We spoke to founders and leaders at 7 SaaS companies—from early stage startups to established companies with hundreds of employees and millions in ARR—to find out where they found revenue leaks and how they plugged them.
Problem 1: Offering unlimited or lifetime plans for early users
In the early days, it might seem like a good idea to offer special “unlimited plans” for early customers. Offering more value for the same or less than competitors can bring in those all-important early users.
But, as Jan Schulz-Hofen, CEO and founder of Planio—a project management solution with over $100k in MRR—found, these plans aren’t worth it as you scale:
“We had added this plan because customers were asking for it following the argument that extra users and projects don’t really increase our bottom line costs as they’re ‘just some extra lines in the database’.”
But as the company grew, those extra lines clearly became a source of leaking revenue for a few reasons:
- More users meant more customer support requests, which can be a huge driver of costs if you’re committed to providing awesome customer support (which you should be).
- Not charging more as usage grows devalues your product
- You’ll never be able to achieve “negative churn”—when the money you make from upgrades is greater than the money you lose due to churn—if you can’t expand existing accounts
SOLUTION: KILL THE PLAN FOR NEW USERS AND TRANSITION CURRENT USERS OFF OF IT
The first step of plugging this leak is to kill your unlimited plans, explains Jan. Stop offering unlimited options to new customers and then reach out to your customers currently on those plans and explain the situation to them.
Offer a new plan that’s a fair deal for both of you and let’s them continue to get the value they need from your product, but puts a cap on how much they can use it before you need to charge more. As Jan explains,
“After all, nobody will reasonably expect you to essentially work for free.”
Problem 2: Giving out unclear or custom discounts on plans
Discounts and SaaS seem to go together like peanut butter and jelly. But while they might seem like a good tool for sealing the deal on new customers, they can quickly become bigger headaches than they’re worth.
“While you probably think giving even small discounts isn’t a big deal, they add up. As you start making millions and millions in revenue, 2% here and 1% there translates into hundreds of thousands of dollars a year you’re either making or losing.”
It’s not just the additional revenue you’re losing that make discounts such a bad revenue leak. As Steli explains, with unclear discounts, you don’t actually know what a customer is worth. Meaning your entire financial structure is out of whack. If a customer upgrades or downgrades, you won’t know what that means in true revenue or churn.
SOLUTION: OFFER THE SAME DISCOUNT TO EVERY CUSTOMER AND MAKE SURE YOU GET SOMETHING IN RETURN
Solving this leak doesn’t just mean getting rid of discounts (although that’s a good place to start). Instead, there are only 2 ways you should be offering discounts to customers:
- Have a pre-approved discount that your sales team can offer to prospects if they need to. As Planio’s Jan Schulz-Hofen explains:“Do not give everyone a 10% discount just because it makes your sales team’s life easier. Have fairly calculated prices and train your sales staff to highlight the value you’re providing rather than trying to win an account with a big discount.”Additionally, Jan says you should only offer discounts on a customer’s current plan. If they choose to change the parameters of their plan, the discount goes away. And try to give away extra value, rather than a price discount:“For example, offer 5 more user accounts for yearly prepayments instead of a 10% price rebate. If done right, this will help with your cash flow and make your customer happy.”
- If you do give discounts, make sure you get something in return. Have a company mention you on their site, blog, or social media, or ask them for referrals in return. The key is to make this a balanced relationship, rather than one where you’re leaking revenue and getting nothing in return.
Problem 3: Creating too much friction in the checkout process
If you’ve got a customer ready to pull the trigger, why would you make it hard for them?
In a recent study, 27% of people said “a long and complicated checkout process” kept them from purchasing. And even though forms with only 7–8 fields performed better, the average online checkout flow in the US has almost 15!
For Teachable CEO Ankur Nagpal—an online platform that lets teachers create and market their own courses—a poor checkout process was costing them serious monthly revenue:
“Underinvesting in our checkout product lead to a lot of customers bypassing our checkout with inferior third-party tools. This meant lost revenue (in the region of mid 5-figures / month) in credit card and transaction fees.”
SOLUTION: REDUCE THE STEPS TO CHECKOUT AND MOVE ACCOUNT CREATION AFTER THE PURCHASE
Other studies have shown that fixing your checkout process has the potential to improve conversions by over 35%. As Chris Geoghegan, product manager at Zapier explains:
“What are you making hard for your customers that could be easier? Your product should make your customer’s life easier, so friction is just a reason not to use the product.”
At Teachable, their solution to this huge revenue leak was to improve and invest in their own checkout product and user flow.
“We immediately spent 6 months improving our checkout including asking for payment first, then authentication, building out 1-click upsells and vastly improving out affiliate functionality,” explains Ankur.
The move brought the majority of their customers back to using their checkout product and significantly boosted their per-customer revenue.
Problem 4: Not optimizing your payment process for different credit cards or international customers
The quickest place to lose revenue is in the checkout process. And while friction in the checkout service itself is definitely an issue, sometimes there are issues outside of your control that you still need to account for.
For example, Oleg Schegolev, CEO and founder of SEMRush, explains how years ago they noticed their payment system rejecting perfectly fine credit cards, which would work when run through a different system. He explains:
“Companies invest significant resources into funnel optimization and A/B testing, but very few try to optimize seemingly minor things such as their credit card acceptance rate.”
At Zapier, they also started to see issues where customers in foreign countries were having issues paying, which created more customer support noise and potentially losing that revenue.
SOLUTION: OPTIMIZE, OUTSOURCE, AND CREATE RESOURCES FOR DIFFERENT PAYMENT TYPES
The issue of leaking revenue through failed payments, or “involuntary churn” has become easier than ever to solve thanks to services like Churn Buster, which automatically handles rejected cards, and works to recover the customers affected by failed payments.
However, for international customers who are facing localized issues with a payment processor, the solution is a little less clear. For Zapier, their solution has been to develop resources and make it as self-serve as possible.
“Whenever we learn about new info or questions people might have around purchasing, we create a resource like this so that we can allow customer to self-serve in the future.”
Problem 5: Not giving successful customers a clear path to upgrade
Leaking revenue isn’t all about losing customers. It’s also about failing to empower your successful customers to do more with your service.
At Zapier, they started to run into this issue more and more as their company grew and their best customers became more invested in the service. Customers were getting their workflows paused when they hit their plan limit. But instead of giving them a clear path to upgrade, Product Manager Chris Geoghegan explains that they were just serving them a “clunky modal” and then linking them to the main plans page.
“This was definitely a point of friction where we were making it hard for successful customers to use our product more,” explains product manager Chris Geoghegan.
Close.io CEO Steli Efti calls this “usage churn”: Where customers are still technically paying you, but they’re stopped using your product or changed their usage significantly for some reason. It’s also a leading indicator that they’re going to leave you eventually.
SOLUTION: BUILD CUSTOM UPGRADE FLOWS BASED ON USER NEEDS
Chris says solving these issues was all about understanding how customers were using their service and giving them a clear path to getting exactly what they wanted out of it.
First, they built usage-based pricing to help ensure customers weren’t paying for services they weren’t using. Next, they changed their approach for when a customer hit a limit on their current plan:
“We changed our approach to instead of showing you a list of plans, we recommended the cheapest plan that you needed in order to do the thing you were trying to do at that moment.” – Chris Geoghegan, Zapier
Whatever your unique issue is, the key here is to get insights into when customers are having issues and not able to use your product to the fullest. Close.io’s Steli says you should look for red flags like customers visiting your pricing page multiple times or searching for ways to cancel their account and then put processes in place to proactively reach out and solve their issue.
“There’s a great opportunity to learn and retain customers and revenue if you’re more proactive in those stages. Yet most growing startups aren’t. They’re not set up to pay attention to these things and act on them.”
Problem 6: You’re trying to be everything to everyone
As your company grows and your customers mature, it’s easy to get caught up in trying to keep everyone happy. But adding too many features can bloat your core product and make it unclear why a customer should upgrade. Or worse, causing them to churn.
For the team at Buffer—one of the world’s top social media management tools—they realized that even though they offered most of the features their customers needed, they weren’t clear in promoting their tools beyond their core social media publishing tool.
As Buffer founder and CEO Joel Gascoigne explained in a recent blog post:
“By far, the key reason we saw customers leaving Buffer over the last year was because we didn’t adequately fulfill jobs beyond publishing.”
SOLUTION: BREAK OUT FEATURES INTO SEPARATE PRODUCTS, TIERS, OR OFFERINGS
So, how do you balance being clear about your value to each specific user as you scale?
For the team at Buffer, finding the answer started with a months-long research project. After speaking with users and understanding the different tools they required along their own customer journey, they decided to break out and group their features into unique products.
“Part of our transition to a multi-product company was observing the needs of our customers and realizing that a wider offering will ultimately keep folks around,” explains Buffer UX and customer researcher Roy Olende.
At Churn Buster, the team also recognized that certain customers only needed specific parts of their offering. And that asking them to buy features they didn’t need potentially sent them elsewhere.
To solve this revenue leak, they broke out a specific, often-requested feature-credit card update pages—into a standalone product called Capture. This way, instead of creating friction by forcing customers to purchase their entire payment recovery and retention product, they made it easier for those who only needed a single feature to feel empowered and become customers.
Problem 7: Not dealing with failed credit cards in a scalable way
When you only have a few hundred customers, dealing with failed credit cards probably doesn’t seem like a big deal. You might even be able to handle them on your own or with some basic, automated emails. But once you grow to a certain point, those failed payments can have serious consequences.
As Matt Goldman, CEO of Churn Buster explains:
“Especially when you pass $500k MRR, it’s critical to have a pro system in place that recovers every possible customer. The reason being lifetime value.”
Specifically, Matt explains how if you recover just one more customer worth $100/month for a year, you’ll end up with an additional $1,200 in new MRR and $7,800 new cash.
And if you’re doing $500k MRR or more? Even just a 1% improvement in failed payment recovery could be worth $6,000 and $39,000 in MRR and cash respectively a year later.
SOLUTION: IMPLEMENT AN AIR-TIGHT, PRO SERVICE TO RETAIN MORE CUSTOMERS AND EXTEND LIFETIME VALUES
If you already have a system in place for handling failed credit cards, there’s a few improvements you can make, like not sending pre-dunning emails, not sending emails every time a payment retry fails, running longer campaigns, and escalating both point-of-contact issues and high-value customers to be handled white-glove by someone on your team.
However, once you’re at a certain size, these basic systems can still be a huge revenue leak.
A pro system will go beyond simply bringing visibility into the performance of your recovery campaigns and high-value customers who should be escalated to your success team. But it should also allow you to continually tweak and test your recovery campaigns without the help of a developer, meaning you recover more payments more often.
Problem 8: Offering too long of a free trial
According to research from Totango, 44% of SaaS companies offer a free trial of their services.
And, why not? Not only does it lower the friction with prospects, but they allow your customers to see your value firsthand, making them more likely to become paying users.
However, not all free trials are equal.
When the team at Bench—an online subscription bookkeeping service for SMBs—first launched, they offered new customers a 30-day free trial. A few months in, however, they realized 30% of those trials were cancelling within a few months of being charged for the service.
“The problem was, 30 days after they identify that they need our service, they’re busy working on something else and put solving their accounting issues on the backburner,” explains Bench CEO and Forbes 30-under-30 recipient Ian Crosby.
“Once we started charging them, they would just cancel because they were paying for something they weren’t using.”
SOLUTION: INVEST MORE IN YOUR CUSTOMERS DURING THE TRIAL PHASE
Instead of simply offering the service for free and leaving customers to try it out themselves, the team at Bench switched their focus to being more hands-on during the trial period. This meant a more robust onboarding experience, while still not charging them until they had a complete month of data in the system.
“We started hand-holding them through the process of connecting their various accounts to Bench, and walking them through what each report means once it started populating with their data.
When we adopted this model, our first-90-day-churn rate dropped by two-thirds.”
Problem 9: Too many bad-fit customers
When you’re growing your company it might feel like any new customer is a good customer. But taking money from the wrong people can actually cost you more than you make.
As Customer Success Consultant and founder of Sixteen Ventures, Lincoln Murphy explains:
“In fact, the cost to serve bad-fit customers is often much, much higher than the cost to serve customers with Success Potential.”
Not only do bad-fit customers cost more to acquire and drain your support resources. But they also create an incredible amount of noise—reducing your ability to serve customers who could potentially benefit more from that attention and be more successful.
Even worse, when those bad-fit customers churn (and they will), they’re going to tell your biggest competitors all about how you do business, giving them insider’s intel and making it harder for you to compete and sign new customers.
SOLUTION: EDUCATE SALES AND SUPPORT ON WHAT A BAD-FIT CUSTOMER LOOKS LIKE AND INCENTIVIZE THEM TO NOT SIGN THEM
As Close.io founder Steli Efti explains:
“Especially in the early days, turning away sales is difficult. But no amount of cash can make up for selling to the wrong customers.”
Instead, Steli says you need to create a “non-ideal customer profile” so everyone on your team understands and has a clear picture of who notto sell to.
Lincoln takes this a step further and suggests even incentivizing inside sales members on post-sale metrics like retention, activation, expansion, and engagement. Even though these are out of their control, it creates a culture of responsibility and accountability for only signing the right customers. Not just anyone.
You can’t be in total control of everything. And as your company grows, you’ll inevitably spring a few revenue leaks. While these might not seem like a big deal, if left unchecked they could do serious damage to your revenue, culture, and even your company valuation.
Efficiency and retention might not be as sexy as user acquisition, but they can be just as impactful for your bottom line. Take the time to learn what to look for and how to “plug” your leaking revenue and it’ll be smooth sailing from here on out.