Traditionally, revenue management has been linked to hospitality and travel.
However, today most SaaS businesses are considering a revenue operations team (RevOps) to manage what they sell and boost profits in a competitive market. This umbrella term combines finance, product, marketing, and sales to provide your product or service the best chance at optimizing revenue.
Revenue management is the strategic use of market data and analytics to predict customer behavior and optimize pricing and allocation of resources to increase business revenue and profit.
Revenue management software allows businesses to track revenue from different sources, prevent leakage, and monitor their offerings to optimize results. It helps to understand customers and align products better with ICPs by tweaking product availability, pricing, and market placement.
Despite originating in the hospitality sector, revenue management is now common in other industries. Its methodology is quickly maximizing profits for the SaaS sector today.
This guide will talk through everything you need to know about revenue management, from building a business case for why you need revenue management resources, revenue management strategies, and KPIs to tools designed to help you along the way.
Revenue management has come a long way to adapt to the SaaS world since its birth within the hospitality and travel industries in the 1970s.
Today, it’s still popular in hospitality and travel and prompts businesses to adapt their pricing and even the services or products they offer. For example, domestic tourism has represented about 71% of all tourism spending in recent years. Revenue management tools and strategies highlighting this trend are prompting travel companies to offer more domestic tourism options as opposed to their usual international offerings.
SaaS businesses have been quick to hop on the benefits train too. Worldwide, SaaS businesses have warped revenue management into a business growth strategy to help adapt their offerings and build more customer-centric pricing plans and products.
Machines can do a lot, but they can’t do it all. If you’re looking to capitalize on revenue management for your own SaaS product, here are a few manual strategies to consider that machine learning can contribute toward, but are ultimately in your hands.
Customer churn rate is the percentage of customers that quit your product or services (churn) within a time frame. Getting a hold on churn rate and churn solutions to minimize that number is your first step to creating a more profitable SaaS business model.
You can calculate customer churn rate using the following equation:
Churn rate = (Number of customers at the beginning of period – Number of customers at the end of period) / Existing customers at the start of the period.
You can measure customer churn rate monthly, quarterly, or even yearly – especially if you run primarily on a yearly contract model. Most revenue management tools should be able to calculate your churn rate for you, and you’ll be able to toggle dates around as you need.
Once you understand your churn rate, you can start optimizing customer retention metrics. Why is this an important strategy? It comes down to business costs. Acquiring a new customer can cost up to five times more than retaining one. Plus, selling to a current customer is 60–70% more likely to be a success, as opposed to 5%–20% success rates with new customers.
A few short-term areas you can consider placing your immediate customer retention focus are:
Customer retention doesn’t stop at onboarding to beat customer churn. SaaS businesses today need to be continually striving to uplift, place, and justify their product with customers.
If you’re not looking at long-term customer retention, you’re not building an evergreen SaaS business model. Customer lifetime value (CLTV) is a good metric for measuring this strategy; it’s one we’ll explore a little later in the article.
Your customer retention metrics fall into the hands of a few different departments within your business. However, much like the concept of revenue management, customer retention is at its best when teams come together under one umbrella.
What teams contribute toward customer retention?
Customer success teams, or account management teams, are your customers’ primary contact point. They determine someone’s success within your product. They ensure people continue to benefit from your product, understand new features or tools, and are at the forefront of relationships.
People don’t follow businesses; they follow stories and people. It’s your customer success teams’ responsibility to continue to showcase your business story, mission, and vision, with charisma.
When we think of marketing, our mind usually jumps straight to acquisition and brand awareness. However, marketing could and should be causing magic amid your current customer base. Marketing teams are at the forefront of referral programs, longevity or loyalty campaigns, and promotions. Plus, they have access to valuable VoC qualitative data that can inform retention strategies.
The bones of keeping any customer around come down to the quality, consistency, and usability of your product. Your product team should be working closely with other departments and running various tests of their own to identify ways to optimize your current product and build features people need.
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A massive pillar of revenue management is marketing spend and ROI. Now, this is not necessarily where your biggest acquisition and awareness spend is. If you look only at that when measuring marketing spend, then we’ll likely end up cutting ties to what could be highly profitable routes to market.
What you need to focus on is your return on investment per route to market. Is your business making enough profit – considering everything you’re spending – to acquire leads from a particular avenue?
For this, you’ll need to ask yourself the following questions:
When you identify your most profitable channels, you can double down on them as you start cutting costs from less lucrative routes.
It doesn’t stop at hard ad spend or asset creation spending. Consider all aspects of human resources needed to make your strategy a success in that market. Are you taking weeks from the marketing team? Are you demanding developer time? Work out what you’re spending on people and their time, not just the content and strategy.
You may see a trend in the customer's lifetime value depending on where you acquired that customer. For example, perhaps customers who come via social media advertising have a high churn rate or lower lifetime value than those coming via PPC ads.
Work out what channels perform well for you in the long term, not those that provide vanity metrics and immediate results. Six hundred new users from social media mean nothing if they churn in a few weeks.
Answering each of these questions should help you identify routes to market that work and those that don’t. Once you’ve got your answers, you can manage your revenue accordingly by doubling up or shaving down.
Don’t put all your eggs in one basket! Just because a particular route is working well for you right now doesn’t mean it will continue to do so in the future – no matter how much money and resources you put into it. There are factors outside of your control that can change the longevity or even the quality of leads you get somewhere.
Of course, the best way of spending money is not to spend it at all. Now we have your attention, organic growth certainly isn’t free, but it’s definitely a lot cheaper than more traditional advertising strategies we’re used to seeing.
Essentially organic SaaS growth leads to more sustainable business growth. But how can you do it? How can you grow organically, minimize spend, and maximize profits?
Content. It’s no secret that great content sells. It’s consistently been a tool for businesses to generate quality leads, drive visits to your website, and build better brand awareness.
It doesn’t come free, though. Quality content needs a budget. You’ll need a collection of talented creative heads to build content that resonates with your brand, mission, and potential customers.
However, if you conduct your content marketing strategy well, you’ll be able to work on evergreen content that supports other areas of the business, builds customer engagement and loyalty, and gets your brand ranking on search engines.
Organic growth goals should sit at the center of any revenue management strategy. If you’re looking for ways to optimize your revenue long-term, then long-term content is your answer.
Although most revenue management tools can’t help you create great content, they can help you prioritize markets, languages, and content types, depending on where there’s a demand and pull for your product.
This strategy is something your revenue management tool can certainly help you with. Tailored pricing plans are an homage to where it all started.
Different businesses and geographical locations will expect to pay different amounts and different ways for your product. It’s near impossible for you to create a one-size-fits-all plan and expect the world to welcome you with open arms.
Your pricing plans need to be as flexible as possible to accommodate as many clients as possible. HubSpot is a great example of flexible and accommodating pricing plans to match any business and its needs.
At first glance, HubSpot has tried to be as inclusive as possible. They offer a selection of currencies along the sidebar, a freemium model to give customers a taste. They also offer options to pay monthly or yearly with a discount and only pay for contacts you market to – not those you store.
HubSpot also gives customers the option to “build a bundle”. It’s a throwback to revenue management in hospitality: Build a burger. Here, customers can pick and choose various tools that are right for them and build their plans accordingly. Side of fries? You’ve got it. No pickle? No problem.
HubSpot keeps the revenue management rolling by upselling as you move through the sales journey. They offer various add-ons for customers to check out with.
What we want to stress here is your capability to be flexible with your pricing. Don’t get stuck in the idea that three plans are sufficient. Think about how you can adapt what you offer and ways for people to pay to be as inclusive and personal as possible.
Once you’ve got your revenue management strategies down, you need to track their success. Revenue management KPIs have emerged in the SaaS world to take care of this. Here are a few favorites.
Your customer lifetime value can be determined using the following equation:
CLTV = Average revenue per account (ARPA) / Net Monthly recurring revenue (MRR) Churn %
Essentially, you want your customer lifetime revenue to be staying steady or preferably on the rise as a key performance indicator to successful revenue management.
If it’s on the rise, it means you’re retaining customers for longer, and those customers are buying more from your business. This can be via repeated contracts, add-ons, or larger plans in the first place.
These two are holistic KPIs as to how your business is performing on the whole. They’re great KPIs for business growth and progress and are best when aligned along side other KPIs.
For example, place your MRR alongside your monthly costs and see what’s helping, what isn’t, what can be cut, and what can be capitalized on. Essentially a financial audit.
MRR = total customer revenue within the month (new and current customers)
ARR = MRR x 12
ARR is a good way of predicting year-end finances and seeing if you’re on track to hit targets. It can help your SaaS business budget better and know if it’s able to make additional expenses.
One of the reasons many new businesses calculate ARR early on is if they only have revenue data for a few months. It gives an idea of where they will be in the future without needing to exist for an entire year prior.
Customer churn rates are great benchmarks to get a hold of and try to beat. You want to constantly be aiming to lower this number, and a strategy we haven’t discussed yet to do so is to adapt your pricing upfront. CCR can set off alarm bells for areas that need attention; it’s something you need to keep a close eye on.
CCR = (Number of users at the start of the period – Number of users at the end of period) / Number of users at the start of the period
RCR usually goes hand-in-hand with churn rate and retention marketing. However, if you’re on flexible, monthly pricing plans like HubSpot, this may not always be the case. You may see you’re losing revenue but not customers, which means customers are going for cheaper plans. If this is the case, figure out how you can upsell to them once again and create plans that generate more revenue and prove their worth in value.
RCR = Net revenue lost from customers in a period / total revenue at the beginning of the period.
Average cost per acquisition is a great KPI to measure if you’re spending your money in the right places and keeping your acquisition strategy as up-to-date and fresh as possible.
It often tends to be the case with paid efforts that your costs just seem to keep rising for you to hit the same amount of leads or conversions each month. It can be worrying and something that needs to be addressed sooner rather than later.
Organic acquisition channels are great ways to counter this number and keep that average low or decreasing. As your brand awareness grows, you shouldn’t have to invest so much in paid efforts – at least, that’s the plan.
Marketing source revenue often comes hand-in-hand with CPA. It determines the amount of revenue you make per marketing channel. This KPI takes into account your CPA per channel, the CLTV of people converting from particular channels, as well as the number of organic leads you receive from each channel.
Wondering how you can optimize these revenue management strategies and KPIs more effectively? There’s an app for that!
A revenue management system can help you align product availability, pricing, and placement down to the smallest details across different markets and segments.
For example, a revenue management system will present your product differently to a 1000+ people corporation in San Francisco to a five-person startup in Barcelona. Both companies may have the same problem, but they’ll need different solutions from your product and different pricing or price plans.
There are a few revenue management tools out there. Each one is just as complex as the next. Price points start at around $10 per month, depending on your business needs, amount of users, and contract length.
* These are the leading revenue management systems as per G2's Fall 2023 Grid® Report.
Generally, revenue management systems help to:
Despite what revenue management software can do, there’s still a lot that needs to be done by you. Ready to explore some top revenue management strategies that you can implement alongside your tech? Step right this way.
You’re now as equipped as you can be to launch a revenue management strategy for your SaaS business. Take the strategies we’ve discussed and tweak them to fit your own business needs. Let your customers build burgers.
Revenue management can save your business money, but it can also build your business a fantastic amount of profit. Make time to bring this strategy to life, and you’ll be thankful for it further down the line.
What’s most important is you give your team the resources they need to make this strategy a reality. That means finding the best technology and tools for your team.
Analyze every touchpoint on the customer journey and build smarter revenue generation strategies with the best revenue operations & intelligence (RO&I) software.