Growth is a north star metric for most SaaS companies, especially in times of economic uncertainty and when funding is hard to get. The imperative for SaaS companies is to grow their customer base, while also ensuring that they retain, and upgrade (if possible) their existing subscribers.
One of the most efficient, and still largely unexplored ways of doing this, is value proposition budgeting. This method of budgeting works especially well for product-led growth (PLG) companies where for all practical reasons, the product is the salesperson.
For PLG-focused SaaS companies, value proposition budgeting (VPB) strategically amplifies the value of the products and services they deliver to customers by allocating funds to those activities that directly increase it.
In this article, we’ll walk you through value proposition budgeting (also known as value based budgeting) and how it can help you grow your revenues by making key value drivers the focus of your allocations.
What is value proposition budgeting?
Value proposition budgeting aligns your budgeting strategy with the business activities that:
- Create the most value for your customers, which ultimately creates more value for your business (less churn and more expansion ARR), and by extension
- Create the most value for your business (ROI)
Value based budgeting is a strategic budgeting method
When creating a budget, companies should take a hard look at the method they’re using from time to time to determine if it still meets their needs.
The SaaS market today is more dynamic than ever, making it important to explore newer strategic budgeting methods, which include activity based budgeting, driver based budgeting, zero based budgeting, and value proposition based budgeting.
This is especially true if you’re using incremental budgeting, which is the traditional budgeting approach that most SaaS companies still use today.
These strategic methods put your company’s needs and growth stage at the core and enable you to become the best version of yourself and hit strategic goals better.
With value proposition budgeting, you can allocate funds based on the value drivers for both the company and the customer, enhancing the overall ROI of the business. While choosing the right approach to budgeting will depend on your use case, value proposition budgeting is best suited for PLG-focused companies.
Value proposition budgeting vs incremental budgeting
Value proposition budgeting is worlds away from the routine approach of traditional, incremental budgeting. Instead of simply adjusting the previous year's allocations, value proposition budgeting helps you to strategically align budgetary decisions with the core value drivers in your business.
Incremental budgeting starts with the previous budget. The budget numbers are then adjusted based on historical data. As a result, previous inefficiencies and other wasteful spending are often carried over into the new budget.
In contrast, value proposition budgeting digs into every expenditure, evaluating its potential to enhance value for both the business and its customers.
While this type of budgeting requires some financial restructuring of your budget process, it promotes more strategic thinking and helps to ensure you prioritize your resources towards activities that drive the most value, rather than based on the status quo.
How to create a strategic budget based on value
Step 1. Define your value proposition
The first step is to clearly understand customers in each market segment you are targeting and what would make them stay with your product. In other words, you need to know their ‘value drivers’. You can do this by running surveys, getting direct customer feedback, or even by getting candid output from the customer success team.
Generally, startups that have found their product-market fit will find this easier than early-stage startups. That said, for companies that haven't found their product market-fit, this approach to budgeting helps them gain additional clarity on how their business is delivering value and what their competitive advantage really is.
Even if you already have a good idea of how you create value for your customers, it's still a good idea to look at them with a fresh set of eyes because in an ever-changing economy, these value drivers might change too.
For example, the ability to scale is a common value driver for fast-growing SaaS companies. If your product or service provides that, your value proposition can remain strong even as your customers’ needs change with accelerated growth.
New competitors entering the SaaS market with new solutions and features can also cause your customers' expectations to change. Value proposition budgeting helps you stay ahead of that.
Step 2. Review your current budget
Value proposition budgeting is a method that requires you to look at every budget category to identify all of the programs, products and services you spend money on. These would include:
- Variable costs in your business: Looking at discretionary spending through a lens that focuses on the value it creates will help you find ways to optimize that spend.
- R&D costs in the context of features: Here, you’re asking questions like, do the customers really want/need that shiny new feature or is it just a nice to have?
Once you’ve identified the activities that need closer evaluation, you can then look at the past ROI for those activities. You're looking at whether the value being created by an activity is worth the expense so you can avoid unnecessary spending.
Step 3. Allocate resources to the activities that drive the greatest value
The key difference between this form of budgeting and other budgeting practices is that you're going to allocate resources to the initiatives that are delivering the most value to the customer and ideally the business as well. The decision matrix below shows a simple way to think about how to make value-based budget allocations.
Value to your customers vs. value to the business need not be mutually exclusive. There may be some overlaps, but it’s easier to evaluate the overall value by making a list of value drivers for your customer and another list of the key value drivers for your business.
Then you build your budget, making sure your allocations are aligned with your value proposition as you defined it in Step 1 for each market segment.
Here’s a list of some common value drivers for SaaS customers:
- Price to value ratio
- Security and privacy
- Customer support
- Product utility
- Reliability (including uptime)
- Customization (including integrations)
- User experience
Here’s a list of some common value drivers for SaaS businesses:
- Recurring revenue
- Profit margins
- Efficiency in customer acquisition
- Customer lifetime value
- Speed of innovation
- Operational efficiency
While these sets of value drivers are distinct, they are deeply connected.
For example, when a product effectively addresses a customer's pain points (e.g. high product utility), it leads to higher subscription renewals and consistent recurring revenue.
Or, if your customers believe that they are seeing a solid price-to-value ratio, they will be more open to pricing changes, enabling you to maintain higher profit margins.
Delivering high value to customers often translates to improved business metrics, ensuring a win-win and hence a well-rounded approach to growth.
Step 4. Monitor, adjust, and evaluate your budget
Your VPB will be far more effective if you implement it as a rolling budget (sometimes referred to as a rolling forecast). A rolling budget is one where you can monitor, adjust, and tweak it when necessary based on either market conditions or other internal factors.
A rolling budget, though both data- and time-intensive, gives your SaaS business the flexibility to adapt and stay focused on consistently providing high value in an ever-changing environment.
A rolling budget is also your best shot at achieving your strategic goals. Having the right data-driven insights will help you make informed decisions about real-time budget adjustments that may be needed to stay on track.
Implementing a rolling rolling budget can be challenging, though. A rolling budget requires that you implement a system for tracking budget vs. actual performance, conducting regular reviews, and revising your budget allocations on the fly based on conditions.
We know. Budget preparation already consumes a lot of time for SaaS finance teams. Adding the additional complexity of setting up your budget plan as a rolling budget isn't exactly something you want to tackle when the financial planning season is upon you. We recommend this just the same because despite the challenges, you’ll always achieve better results with a rolling budget than with a static one.
Drivetrain can make that easier, by the way. Implementing a rolling budget in Drivetrain is a breeze because it's a purpose-build financial planning and analysis (FP&A) platform that eliminates all the manual effort doing so in a spreadsheet would require.
With the ability to automatically aggregate the data you need from all your different source systems into a single platform and update it in real time, you can quickly and easily update, review and revise your budget anytime you need.
Value proposition budgeting is a win-win for you and your customers
With the highly competitive landscape in the SaaS market, value proposition budgeting can help you keep your eyes on the prize, aka, customer happiness. It can help you stand out in a crowded market and turn your users into loyal product advocates.
PLG-based companies will find VPB particularly useful. While there is always a debate on what qualifies as ‘value’, you can sort that out with data analysis and collaboration on the front end to establish a common understanding.
They say there’s no better salesperson than your product! So, why not, give VPB a shot and make your product and, by extension, your company, salesperson of the year?