NDR Growth Tactics 5: Reduce Package Down-sell
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talio.
Net Dollar Retention (NDR), or Net Revenue Retention (NRR) to use the more generic term, have become a priority for most SaaS businesses. The reasons are simple.
Customer Acquisition Costs (CAC) have already been covered so this is a very cost efficient form of growth
Buyers and investors want to be sure a solution delivers value; NDR growth is strong evidence of value
Positive NDR shows that the company has the ability to overcome the natural account churn that is part of any SaaS business
Ibbaka has a compelling framework for delivering NDR growth, one that is well supported in the Ibbaka Valio platform. We are sharing this framework in this series of eight posts.
NDR growth tactics 5: Discourage Downsell (This Post)
The six NDR factors are often shown using the NDR waterfall. This is a powerful tool to understand what levers are driving NDR and where actions should be focussed.
Reducing package down sell as an NDR lever
Package downsell occurs when customers move from a more expensive to less expensive package. Why would they do this?
The simplistic answer is “they are not getting enough additional value from the higher priced package.” To really answer this question though will depend on two things:
The role each package plays
The fences and pricing metrics used for the package
If you have more than one package, and most SaaS companies do, you should have defined a clear role for each package. Even something as apparently simple as the classic Good Better Best packaging architecture, used by about 60% of B2B SaaS companies, can be used to execute on different package tactics.
In the Align approach, one tries to bring buyers into the package that best suits their current circumstances.
In the Upsell approach, one uses a low priced or free package as an attractor and then has an upsell motion.
These two approaches lead to different tactics when it comes to reducing downsell.
For each package, make sure you have defined a role and targets for each package.
Reducing downsell under the align packaging approach
In the align approach you have tried to bring the buyer into the package that best meets their needs right from the beginning. This is how Ibbaka has designed Valio pricing.
The key pricing metric here is the number of models built and managed, there are no restrictions on the number of users. There are additional fences based on integrations and support hours; the scaling metric - managed revenue fee - begins from the second year, once a baseline has been established, declines across the packages. The key guides are the number of models and the types of integration needed.
In the alignment case there are two reasons for downsell.
You sold the wrong package to begin with
The customer’s situation has changed
You sold the wrong package to begin with
Sometimes a customer gets into a package that provides more than they need. There are several reasons for this.
The customer wants to take on more than it is actually able to take on (or as my mother would say, ‘their eyes are bigger than their stomach’)
The customer has been oversold and convinced by sales or marketing to commit to more than they need
The packages do not deliver on their value propositions (marketing and sales have gotten ahead of the product’s reality)
Overselling and under delivering, erode trust. The sale may look good when it is made, adding to ARR and chalking up a big win and new logo, but if the value and needs are not aligned it can be a short term win. The best outcome is down sell, the more likely outcome is loss of trust and churn.
One way to avoid the loss of trust that comes with overselling, or over buying, is to automatically step down to the package or number of users that the customer should have bought and then build back up. Slack does a good job of this. Here is the pricing and the FAQ on active users.
Automatic down selling may not seem to be a very good way to grow NDR, but as long as you are providing value, and have a good scaling metric in your pricing design, it can be. Long term relationships depend on trust, and value based pricing is about building trust and aligning price to value over time.
The customer’s situation has changed
In this case, if you are seeing downsell it is because your customer’s situation has deteriorated.
Headcount reductions
Lower level of business activity
Mergers that reduce and concentrate your customer base
Business conditions at your customers’ customers driving their own business performance
The tactics here are the same as when you are trying to avoid in package shrinkage. See NDR growth tactics 4: Avoid Package Shrinkage.
Reducing downsell under the upsell packaging approach
When you have an upsell packaging approach you want to avoid downsell. Package downgrading, is painful and can play havoc with your metrics. You have likely put a lot of effort into the original upsell and you don’t want to lose it. The key to limiting downsell lies in value path design.
“Value path: a series of actions taken by the user that results in something of value.”
When designing packages for the upsell approach the key is in how you connect value paths. You want the value paths to build one to the next so that people want to upgrade and continue their journey with you. They will not want to lose value they are accustomed to.
So make sure that there is value delivered in each package and that the value increases from Good to Better to Best.
One way to do this is by giving the customer a larger percentage of the value created as they move from Good to Better to Best. Some tests of this approach have shown that it does reduce package downsell.
Note that this is the not necessarily what you would do to draw people in with a low price offer. Many companies executing on an upsell approach intentionally underprice the Good package to get people into the program.
There are a lot of design choices to be weighed here. The first step though is to be aware of what choices are being made and why. The table shared above is a key tool. Make sure that for each package you have a well defined …
Role
User Target
Usage Target
Revenue Target
Upsell Target
Downsell Expectation
Renewal Target
In our next post, we will look at the most important of the three negative levers, reducing churn.
Download the NDR Report here
Read other posts on Net Dollar Retention
Pricing Diagnostics and Rapid Response (Master Class with PeakSpan)
Using Pricing to Optimize NDR (Master Class with PeakSpan)
NDR Growth Tactics 5: Reduce Package Down-Sell (this post)
Net Revenue Retention (NDR) impacts the value of your company
