Second-Order Revenue

October 7, 2019 • #

In SaaS there are dozens of common metrics to measure on performance, like a pulse check on your company. Because of the often-high customer-to-revenue ratio with SaaS products, recurring revenue itself becomes a watermark metric to watch as an indicator. Recurrence leads to investing in and measuring customer success metrics, in order to keep that recursion happening indefinitely — customer lifetime value gets large with satisfied customers!

NPS, time-to-value, net retention, and customer health scores are just a few of those metrics that help give you a leading indicator of future revenue potential.

I love the term “second-order revenue” as a way of emphasizing the value of these customer success tactics. First-order revenue is that which is generated directly by a customer. Second-order revenue is money that is a step removed from, but still derived from, that customer. Some examples:

  • Customer implements your product at one company, switches to a new company, then rolls it out there, too. One relationship, two accounts.
  • Referrals from one customer to other folks in their network — why NPS is so valuable!
  • Word of mouth is a type of referral, but is frequently less direct. Customer hears “good things” about your product from people in their network, an event they attended, or similar, then buys for themself.

For a company with good product-market fit and a high NPS, it’d be amazing to calculate hard numbers around second-order revenue. It can be hard to trace the exact source of a customer — often it’s not a single thing, but a combo. We’ve found single individuals that highly value our product can drive enormous amounts of benefit by getting this exchange right.

As Jason Lemkin says in the SaaStr post linked above: “don’t shortchange second-order revenue.”