Annual contract value simply means the price you charge customers to use your product for a year. In this article we’ll dive into different ways to structure your contracts to keep churn low, keep customers engaged, and to make sure you’re making the most from your SaaS product.
Ask yourself this question:
Will you charge very little to millions of potential customers or a lot to very few customers?
Freemium works great on low price point plans, but terribly on high price points.
Hiring a field sales rep to sell a freemium product doesn’t work financially, but works great at price points above $50k/yr.
Lets take a look at 12 companies with very different price points that all reached more than $10m in annual recurring revenue.
12 Very Different SaaS Company Examples That All Do More Than $10m in Revenue
There are many ways to reach your first $1m, $10m, and $100m in saas revenue but you have to pay attention to many SaaS metrics. Lets take a look at 4 very different price points and real life examples.
Total Contract Value (TCV) of $5-$100 Per Year:
Freemium model works well here. Give your product away for free to keep your top of funnel really wide. Identify what point in the onboarding your users get max value and put your paywall there. If you pick the right spot for your paywall, you should see a 5-15% conversion rate from free to paid.
Examples:
Quizlet: 1m customers that pay $15/yr
Tsheets: Sold for $350m+ to intuit after getting 800,000 customers to pay $50/yr on average
Videblocks: $20m in revenue (ARR) from 150,000 customers that pay $110/yr on average
Total Contract Value (TCV) of $100-$1000 Per Year:
Low touch models work well here. Try webinars at scale with partners. Pay the partner 30-50% of first year revenue from all customers they drive. Those partners will fill your webinars, you sell, and grow your revenues.
Examples:
Typeform is a b2b SaaS company with $1.4m in monthly recurring revenue ($18m in ARR). They grew by launching hundreds of integrations with partners.
WebinarNinja hit $12m in ARR by hitting a $400 first-year ACV on most of its 13,000 customers. Gross churn is high at 48% but they still have a customer lifetime value (LTV) of over $800 and pay $0 on CAC because the “Powered by WebinarNinja” product marketing button drives most new customers.
Dialsource has grown to $18m in ARR by using the Salesforce customer base. For many years, Salesforce was the only integration Dialsource promoted. It’s dangerous for the revenue of a business to be tied to one partner but in this case it worked. It wouldn’t surprise me to see Salesforce acquire Dialsource sometime in the next 3 years.
Total Contract Value (TCV) of $1000-$50,000 Per Year:
$1000-$50k/yr: At this price point you can afford to hire a sales person. Do the math though. That sales person should be focused on closing a customer contract where the annual value is north of $5,000 otherwise there isn’t enough margin to pay the marketing expenses and sales person commission and still make money on the customer.
Examples:
Pandadoc has 13,000 customers and a revenue run rate of over $18m. Most of their early traction came from their salesforce integration but they’ve branched out since then and expect to add another $1m in mrr over the next 6 months.
CloudCheckr has 600 customers that pay $2,000/mo or an annual contract value of about $24k. They do over $20m in annual revenue. The lifetime value of these customers is over $100,000 because churn is so low. ACV, customer acquisition cost (CAC), and churn are all important SaaS metrics you should be tracking.
VenaSolutions has 500 customers that pay $50,000 per year on average. The customer acquisition cost, (CAC) for these customers is $50,000 so the company makes their money back in 1 year, a 1 year payback period. Vena also makes extra money by charging one-time fees in the form of an upfront implementation cost. This drives higher retention and lifetime value over the long term and s a reason the company does over $20m in revenue today.
3 SaaS Companies With Annual Contract Values (ACV) Higher Than $50,000
At this first year contract value, you can afford to fly sales reps to potential customers. This is called field sales. A typical field sales rep will have a quota of $1m+ and if they sell that much, they’ll make about $100k base and another $150k in commissions. If you’re running a SaaS business, follow this math assuming the sales person is closing customers with a low churn rate, and high average contract values.
Examples:
MovableInk has 500 customers that pay $80k/year on average. They have a sales team of over 10 field sales reps that go out and hunt these larger contract values. Today the company does over $40m in annual recurring revenue (ARR).
Lucidworks has 400 customers that pay $100k/year on average. The company does over $40m in revenue by using a robust field and inside sales team approach.
Atrium has 30 customers that pay $300k/year each. They do $11m in annual recurring revenue showing there are many ways to hit your first $10m in revenue. You can charge a lot to very few customers, or a very little amount to millions of customers.
SaaS Metrics To Consider When Coming Up With Your Annual Contract Value
Lifetime Value: If your price point is too high relative to the value you provide, customers will churn and your lifetime value will sink. Lifetime value measures the total amount a SaaS customer will pay you over many years.
Customer Acquisition Cost (CAC): If you’re in a very competitive market, it may cost more to get new customers. You’ll have to charge more to cover that cost otherwise you’ll go bankrupt. When you’re just starting out, you should be able to make back your CAC in under 3 months. As you get more mature, and have more money in the bank, you can afford to get more aggressive acquiring customers and wait longer to get paid back.
One-Time Fees: Depending on your price point, it may make sense to charge 1/3 of your total SaaS recurring revenue contract value as a one time set-up fee. This will help make sure new customers get value from your product over the long run and stick around.
To wrap things up, as you think about what your annual contract value should be for each customer cohort, make sure the financial math works. Lastly, ask yourself “If I charge this price point, how many total customers do I think I can sign up”. Multiply that customer count times the price point. This is the total revenue you think you can make with that customer count x price point combo. If you don’t like the total revenue, you have to change your price point. Lower price point and more customers, or higher price point and fewer customers.
Many companies die because they charge too little, or don’t charge enough.
