How Strategic Buyers and Investors View Up-Sell and Cross-Sell in SaaS

A SaaS company’s ability to grow organically within its existing customer base is an important factor in whether that company will attract interest from buyers and investors.

Companies that have a track record of growing revenue via up-sells and cross-sells (in concert with strong retention numbers) will be well positioned for a successful outcome when exiting their business or raising capital. But in many cases, founders don’t track or pay attention to the up-sell or cross-sell as a growth driver like they should.

Having advised many SaaS founders through successful M&A and capital raise transactions, here are our thoughts about why founders should pay closer attention to their company’s ability to up-sell/cross-sell.

Why Do Buyers and Investors Care About Up-Sell and Cross-Sell?

To point out the obvious, up-selling and cross-selling are important to buyers/investors because a company that sells more makes more (and grows faster), and is therefore a better asset to invest in.

But the specific dynamics of up-sell and cross-sell go beyond just making more money and growing faster. Namely:

• New revenue from up-sell or cross-sell is almost always less expensive to acquire than that of a new customer
• A company’s ability to "land and expand" reflects positively on its strategy and product
• The more a customer spends, the less likely that customer is to churn, so companies that are good at up-selling/cross-selling tend to have stickier customers

What’s the Difference Between Up-Sell and Cross-Sell?

Up-selling and cross-selling are largely the same and people often use "up-sell" to refer to both. But buyers will often separate these two in an effort to understand how your company grows its average deal size across the life of a customer. As such, founders should be able to talk about how they employ each approach in their company.

To differentiate the two terms:

• An up-sell is when you sell more of the same product to a customer (usually in the form of additional licenses, seats, or usage fees)
• A cross-sell is when you sell a different product or module to the same customer

The net effect of each approach is the same (larger average contract value), but your success in either approach says something different about your company.

If your company has a track record of making up-sells, then your product is likely very sticky within your existing customer base, which will positively influence retention.

If your company has a track record of making cross-sells, then your company does a good job at developing or acquiring other products that you can sell into your same customer base.

In either case, you will want to emphasize your strengths when marketing your business to prospective buyers or investors. As part of doing so, you will need to calculate and present your net revenue retention.

Net Revenue Retention: The Metric for Up-Sell and Cross-Sell

Net revenue retention (NRR) encapsulates your company’s ability to retain and grow revenue within your existing customer base.

Represented as a percentage that can exceed 100%, NRR reveals how the revenue from a cohort of customers either grows (NRR > 100%) or contracts (NRR < 100%) from year to year, given your rates of churn, down-sell, up-sell, and cross-sell.

If your company has NRR greater than 100%, that puts you in a great position for rapid growth, since your revenue base will compound from year to year as you retain and grow average contract value via up-sells.

What is a good NRR?

Determining a strong, satisfactory, or poor net retention rate depends on many factors.

That being said, in general, a company with a rate over 120% is considered world-class and is going to see high valuations. Anything over 100% is good. For companies with <100% NRR, buyers/investors will take a harder look at gross and logo retention to get a better sense of the company’s ability to retain customers/revenue.

Among the companies we’ve represented in the last 5 years, the median net revenue retention rate was 108%.

Learn more about retention metrics

Up-Sell and Cross-Sell as Part of a Complete Story

Up-sell and cross-sell make up only a small portion of the overall story you will need to present to buyers/investors. Other quantitative and qualitative aspects of your business will have strong bearing on whether or not you’ll be able to attract interest and achieve a successful outcome.

As a founder, you can’t expect yourself to know everything that a buyer/investor will look for when evaluating your business. As such, one of the best decisions you can make is to hire an investment bank to help you build a cohesive story that positions your story in the best light.

Learn more about hiring an investment bank to sell your business or raise capital.