3 Steps to Increasing Our Average Revenue Per User by 2.4x
We launched in 2013 with 2 plans, one free and the other $49/mo—so to get to $1 million annual revenue run rate, we would need a whopping 1,700 customers.
Today, we have just over 1,700 customers, and we’re running at a $2.49M annual revenue run rate, more than 2.4x what we were originally on track for.
It’s been a slow ramp, but over the last 2 years, we’ve methodically raised our average revenue per user (ARPU) from $49 to $116 and climbing.
Not many people talk about it, but raising our ARPU has made it possible for us to achieve so much more with less.
It’s increased our margins which has allowed us to bootstrap the business post-Y Combinator. Rather than focusing on how to raise money from investors, boosting ARPU has been our process of raising money from our own customers—by building the right product and building value.
1. Raise Prices 8x
In the words of SaaS guru Patrick McKenzie, “Most SaaS starts out underpriced.” Fundamentally, this is because technical founders tend to undervalue software.
We made the same mistake by starting out with a free tier and $49/mo premium tier only. We raised our prices twice, until our highest listed tier exceeded 8x of what it was when we started—and it didn’t negatively effect conversions at all.
First, we added deeper pricing segmentation. Since launch, we’d seen a wide range of companies sign up for our product, from small startups to big enterprises — and we realized we needed to strategically monetize these segments. We went from 2 tiers to 4 tiers: Hobby ($19), Startup ($79), Business ($249) and a “contact us” enterprise plan.
Second, we upped the pricing just to see what would happen. Hobby went to $29, Startup to $99, and Business hit $399, a 60% increase—and we didn’t see a conversion drop.
Still, it took us awhile to work up the confidence to increase our prices. We raised prices for the first time in Fall 2013, 6 months after we launched, and for the second time in early 2015, over a year later.
And it didn’t come from running sophisticated analytics or hiring expensive consultants. For us, the change came when we realized our product was well worth its price tag — and then some. Since we had a low churn rate and worked constantly to improve the product every day, we felt assured that we were delivering value, and that it was fair to capture a bit more of it.
It’s probably easier to raise your prices than you think, and it could be the quickest, most direct path for you to improve your business.
Don’t trick yourself into thinking you need to set up analytics or an A/B testing framework as a prerequisite to making a pricing change. All you need to do is eyeball your numbers—if you don’t have a noticeable drop, then great. And if it doesn’t work out, pricing changes aren’t final—you can always change your prices back.
Give it a try, and see what happens. We did, and it helped us increase our ARPU dramatically.
2. Focus Product Development on MRR Growth
MRR growth is our compass metric, which we use to guide us in deciding what features to build. Those likely to increase MRR, by getting customers to upgrade to a higher plan, are prioritized. This ensures that we aren’t just building —we’re building value that customers are willing to pay for.
For example, from day one, an enterprise customer of ours asked for a specific feature called Component Subscriptions, which allows status notification subscribers to pick and choose the specific components they want to receive notifications about.
We punted on the feature at first since they were the only ones to ask, and it really wasn’t needed by the majority of our customer base. It sounded like a nice-to-have, but nothing that should get priority.
Over time, however, we began to hear a substantial amount of interest both from the enterprise company and from other core customers.
Instead of just logging the number of requests for the feature, we quantified the MRR growth that we expected to get in upgrades from building the feature. When it started to get very significant, we decided to build it.
If you have a product that people want, you’ll have a constant backlog of features that customers ask for. The backlog means you’re doing something right, but it also means you need to figure out how to spend your time and how to prioritize product development.
It’s hard to sift through the noise and find the product features that will move the needle on customer happiness and for your business.
Using MRR as a compass for product development not only ensures that we’re always increasing our ARPU, but also ensures that we’re picking out the product improvements that will build real value for our customers.
Over the life of StatusPage.io, we’ve had 4x as many upgrades as downgrades and 21% of our total customers have upgraded plans from a lower tier to a higher tier. That lets us know that we’re on the right track.
Working backwards from your MRR goal to decide which features to build can help bring clarity to your product development process. Quantify a potential feature’s effect on MRR and use that to rank the feature’s priority.
It’s easy to be a “yes” person and acquiesce to all customer requests. It’s hard to get to the core of why a customer requested a specific feature. Is it because their boss asked them to request it? Is it because they’re confused on how to use your product? Or is it actually because they need the feature?
If you’re new to product development, try going through the five whys when talking to a customer about a request to get to the core of the issue.
You’ll know if you’ve made the right call on building a feature if you’re able to either (a) get more signups to hit an activation threshold or (b) get core customers to upgrade for that feature.
3. Go Enterprise for a 20x Bump
The largest bump to our ARPU has been through getting more customers on our Enterprise plan. We now have a number of customers on our enterprise plan, with a few paying us $1,000+ every month.
To be honest, before we started StatusPage.io, we had no idea how big enterprises worked, what they needed, and how to do deals with them. Initially, when an enterprise would tell us what they wanted, it didn’t make any sense to us—so we said “no” to everything.
Over time, through talking with customers, asking a ton of questions, and listening to what they needed, we’ve begun to understand big companies better. We’re able to say “yes” more, because now we get the wider context on how enterprises work and in what direction supporting them would take our company.
Recently, we’ve said “yes” to:
- Access Control: Enterprises need to be able to segment customers based on the specific hardware or products—e.g., AWS EC2 vs. RDS—and show them different status messages. This happens because enterprises have far more sophisticated hardware and systems than your normal company and have to support 100,000+ customers on a wide variety of configurations.
- Single Sign-On: You’re a big company and you want an internal status page, but you don’t want to have to issue another set of login credentials to every person in your company just to access it. This is hugely annoying for big companies, and that’s why single sign-on is one of the most common ways to create feature segmentation for an enterprise tier.
- Signing Master License Agreements (MLAs) and Service Level Agreements (SLAs): Enterprises often won’t even consider doing a deal with you—no matter what features you have—unless you sign one of these. Oddly, by signing a piece of paper, you can get a 20x in the purchase price, because only big companies with tons of money need these for internal auditing.
And not only has it increased ARPU, but going enterprise has also helped lower our churn from the 3% to the 1% range. Because the process of signing up for a new service is tougher, they’re less likely to leave a vendor once they’ve signed up.
We’ve closed a number of bigger deals, all inbound without any sales team, purely via opt-in enterprise pricing. It’s been a huge boon to our business and our fastest growing customer segment.
Selling to enterprise sounds daunting, but you can slide into it gradually, and it’ll have a huge impact on your ARPU.
Create a “contact us” enterprise plan in your pricing and talk to the customers who reach out to you. You may be able to sell enterprise plans based solely on signing MLAs/SLAs, without having to build additional enterprise-specific features.
Even if you don’t close any deals, you’ll have a channel for high-value potential customers to chat about what they need. The call-to-action on your enterprise plan can be as simple as a mailto link to a shared company inbox. Get on the phone with them to talk about their needs, synthesize it with the other feedback you’ve gotten, and use that to prioritize your feature list.
When you’ve built the feature, reach out to every enterprise customer you’ve ever talked to, and give them the update. You’ll get immediate sales and upgrades, and for those that don’t buy, you’ll start more conversations about enterprise features that would make them customers.
Over time, when your enterprise plan really gets stacked with features, you’ll be able to go from self-serve SaaS to building a sales team and really blowing it out.
What’s Next—Customer Success
Moving upstream and increasing ARPU has helped us massively in keeping the support burden low. We’re able to manage $2,490,000 in annual revenue with just a single support rep.
Now that we’ve increased ARPU and we have enterprise customers, it’s become economically feasible for us to have account managers and a full-fledged customer success team. It’s created a huge opportunity for us to provide even better service to customers, drive down churn, and increase utilization and upgrades.
Our upcoming goal: Create a repeatable process for lowering churn and increasing ARPU through customer success. Here’s our plan:
- Call our customers at 3, 6 and 12 months after converting to chat with them about how we’re performing.
- If they have any issues, we’ll be able to pre-empt churn by addressing them before they become big problems.
- We’ll discuss how they’re using the product and how they can get more out of it to solve their problems.
- Through increased utilization or if higher tiers have valuable features for customers, we’ll encourage plan upgrades.
If your customers all pay you $5/mo, it doesn’t make economic sense to build a customer success team. Increase your ARPU, and you’ll earn the chance to get really personal with your customers, offer “surprisingly good” service, and watch your customer lifetime value surge.