User based upgrades are wrong


If you’re depending on your customer base to add users as a way to drive upsells, you’re doing it wrong. Here’s why:

Charge based on value, not seats. You shouldn’t be charging the customer based on the number of seats/users they have on your platform, or at least shouldn’t advertise it that way. You should be charging based on the value and ROI you’re generating for the customer, materially discounted of course so they can realize that value. Then, you should allow the customer to onboard as many users as possible onto your platform. This creates strong evangelism at the client and prevents you from losing the customer because the “champion” left the company. The more users on your platform, the higher the stickiness, so don’t dissuade usage with your pricing.

Pricing based on users cuts both ways. If there is a recession or if the client needs to cut users back because of their own internal issues, your retention figures will be impacted at no fault of your own.

What’s the right way? It’s by offering new features, new integrations, and new functionality to your platform, then upselling based on the new ROI generated for your client. This is how the big software players do it. Below are examples:

Ever Commerce which went public states the following in their S1: “Our ability to cross sell additional products and services to our existing customers can increase customer engagement with our suite of solutions and thus have a positive impact on our net pro forma revenue retention rate. We believe we have the opportunity to drive incremental revenue growth from our existing customer base through increased cross-selling of our integrated solutions, including digital payments, customer engagement and marketing technology.” Furthermore, “This “land and expand” strategy allows us to acquire customers with key foundational solutions and expand into offerings via product development and acquisitions that cover all workflows and power the full scope of our customers’ businesses. This results in a self-reinforcing flywheel effect, enabling us to drive value for our customers and, in turn, improve customer stickiness, increase our market share, and fuel our growth.” No mention of upsells via expanding seat count.

Sentinel One which went public states “As we enhance our platform functionality and value proposition, we expect many of our customers to adopt additional platform functionalities and Singularity Modules to address all of their cybersecurity use cases through the same platform and agent. We have architected our single agent such that we can immediately activate additional modules for our customers on the already deployed agent, so adding increased functionality is seamless for us and our customers. This gives us the ability to show in-product promotions and trials and to drive the expansion of our Singularity Modules, The power of our land-and-expand strategy is evidenced by our 119% and 117% dollar-based net retention rates as of January 31, 2020 and 2021, respectively.” No mention of upsells via expanding seat count.

CouchBase states “The Couchbase platform is licensed per node, which we define as an instance of Couchbase running on a server. Our subscription pricing is based on the computing power and memory per instance, as well as the chosen service level. Growth of our revenue from our existing customers results from increases in the scale of their deployment for existing use cases, or when customers utilize our platform to address new use cases. In addition, our professional services organization helps customers deploy new use cases and optimize their existing implementations.” Use cases, not seats.

Powerschool says “Many of our customers begin their journey with us by using only two of our 15 products, on average, as of December 31, 2020. As customers begin to appreciate the benefits of an integrated software platform across student data, classroom learning, office functions and talent management, they increase the number of solutions they buy from us over time, with over 1,000 customers owning 5+ products and over 3,000 customers owning 3+ products as of December 31, 2020. Our future revenue growth is dependent upon our ability to expand our customers’ use of our platform, and our go-to-market efforts are designed to drive cross-sell growth.”

So, while expanding your product to other teams or adding seats counts as an upsell and does work, the healthiest way to upsell an account is by expanding the scope of the product, adding features, integrations, and functionality you can then charge for across the entire platform.

Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at sammy@blossomstreetventures.com. We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.