Value proposition budgeting in SaaS: How to boost business value for your customers

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:

1. Create the most value for your customers, which ultimately creates more value for your business (less churn and more expansion ARR), and by extension 
2. 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. 

How technology can facilitate your analysis

Developing the in-depth understanding of your customers that this budgeting method requires can be challenging, especially the more complex your business is.

For example, the more products you sell the more time it will take as you need to determine and verify the value proposition for each one. Similarly, different markets and geographic regions will have their own individual characteristics that must be evaluated individually to determine the most important value drivers in each.  

There are many budgeting tools on the market today that can be quite useful in building a value proposition budget. However, a more comprehensive, purpose-built financial planning and analysis (FP&A) software like Drivetrain can provide more robust features that will allow you to drill down deeply into all the various dimensions in your business.  

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.

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
• Scalability
• 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. 

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, if you’re ready to give VPB a shot and make your product salesperson of the year, check out Drivetrain to see how easy it can be!