Why Product Attach Rates Are So Important
Expanding the TAM and Showing Execution....This is the Way
“Our platform strategy continues to resonate in the market. As of the end of Q3, 77% of customers are using 2 or more products, up from 71%, a year ago. Additionally, 31% of customers are now using four or more products, which is up from 20% last year. And this quarter, about 70% of new logos landed with two or more products.”
“Our module adoption rates demonstrate the flywheel effect of our platform in motion with subscription customers that have adopted four or more modules, five or more modules, and six or more modules increasing to 68%, 55%, and 32%, respectively, in the third quarter. We believe high adoption rates of our modules drive high retention rates and reflect our growing position as the trusted platform of record with the average number of modules per customer also increasing quarter after quarter.”
“We also saw positive momentum on multiproduct adoption. As of Q4, 21% of our customers use more than one Freshworks product. In the cohort of customers paying more than $5,000 in annual recurring revenue, the multiproduct adoption is even higher at 35%….These multiproduct trends have naturally led to higher revenue per account and contributed to improvements in churn for us.”
Above you can see quotes from the recent earnings calls of three enterprise software companies Datadog, Crowdstrike, and Freshworks. All of them are talking about multi-product adoption or said different the attach rate of new products to the initial product that the company sells in to a customer. Notice some have been public for longer while others are newly public companies. All report on attach rates.
This is an incredibly important metric to track as it predicts the health of the customer and also the progress/success of a new product being released.
Why is it so important?
1) It’s Not the TAM you Enter With It’s the TAM You Exit With
My colleague Ed had a great newsletter post this week (subscribe to it if you haven’t yet!) talking about how in the early days of a startup, a TAM can seem small but the ability to expand that TAM is what creates the biggest outcomes. The companies mentioned above are expanding their market size by releasing new products. Now it’s not enough to simply release new products and sit there. There’s a ton of execution to make that new product in an adjacent category work. But if done successfully, the outcome leads to a much bigger company in the long term.
2) Validates the Strength of an Existing Distribution Channel
When a company launches an adjacent product, monitoring attach rates is the way to test how sustainable and strong the existing distribution is. This could take the form of inbound leads, field sales, channel partners, marketplace sales, etc. The fact that Datadog can launch a new product and see 70% of new logos landing with 2 or more products means the distribution channel is working exceptionally well. This gives the team further confidence that as the R&D team ships a new product or as the company acquires a new product, the gtm engine will successfully be able to get that product into the hands of customers.
3) Increases Capital Efficiency
Multi-product attach rates have the benefit of helping a company spend less money per customer. The reason for this is three-fold: lower CAC to sell new product, higher revenue per customer, and lower churn. If a customer is buying two or more products from a company, it is unlikely they will churn anytime soon. That increases the LTV of that customer meaning you can expect more profit and free cash flow in the future. The common rule of thumb is that selling into an existing customer costs about 50% less in gtm costs. While this may not always be true, it is generally the case that cross-selling or up-selling an existing customer is not as expensive as a completely new one. Finally, this leads to higher ACVs per customers which keeps sales reps happy, gives more case studies to use for future customers, and usually results in the market giving the company a higher multiple on the stock to then use on M&A to further expand the TAM.
4) Further Cements Lead In A Market
By selling multiple products into customers in adjacent categories, companies are blocking their competitors from selling into those same customers. Given that, they are increasing their market share while disadvantaging the competition. New competitors will also think twice about competing with the existing company as there will be plenty of examples of where that has failed in the past.
5) Uncover a New Market Opportunity
The best thing that can potentially happen when a company releases a new product is that new customers start to demand that new product first. All of a sudden, the company can now land with the existing product or the new product depending on the persona they’re engaged with. In Datadog’s case for example, I imagine that some customers are landing with APM rather than monitoring as they have legacy solutions in place that don’t do the job. This creates even more entry points into customers enabling further TAM expansion!
Conclusion
For investors and founders, it’s key to monitor product attach rates of the companies you’re involved in. This not only applies to public companies but private companies as well. In Boldstart’s portfolio, Snyk, BigID, and Security Scorecard are examples of companies that are actively analyzing their metrics on attach rates to understand how new products are performing. As these products resonate, the teams invest more heavily behind them to expand their surface area with customers. All of this is not to say that a single product portfolio is a bad thing. In fact, in the beginning of a company’s journey, that focus is a necessity. However, in terms of creating a durable long term large company, the best companies like Salesforce, Adobe, ServiceNow, etc have all shown the competency of expanding into adjacent markets and leveraging their distribution to expand their TAM.
Good stuff, Shomik! 💚 🥃