Several businesses focus on acquiring new customers as that is what is going to help grow their business. As true as that is, getting new business from existing customers helps grow your business much faster than focussing on new customers alone.
What is Expansion Revenue?
Expansion revenue is the revenue growth that comes from your existing accounts through upselling, cross-selling, and add-ons.
Upselling is selling advanced product features to your existing customers that is not available in their current pricing tier. For example, a customer might start on a basic pricing tier with limited features. Upgrading them to the next tier with more features at a higher price is upselling.
Cross-selling is selling other products from your product portfolio to existing customers. For example, if a customer of Microsoft uses Office365 and if that customer is sold Dynamics CRM (Customer Relationship Management) as an example, that is cross-selling.
Add-ons is selling one of the features or licences to existing accounts. For example, if a customer has bought a CRM system that can store details of 1000 contacts, selling an additional set of say 500 contacts to that customer is selling Add-ons.
Expansion MRR Rate Formula
Expansion MRR (Monthly Recurring Rate) is an important metric to track to identify whether your existing customers are buying more or less of your products from you.
For example, let us say our expansion MRR for beginning of June was $2,500 and our expansion MRR for the end of June was $3000 then applying the formula above we get:
Why is Expansion Revenue Rate important?
Initially the focus for any SaaS (Software as a Service) business will be to acquire new customers. But it is not sustainable or scalable to keep acquiring new customers at the same rate that you did in the early years of your business. So even though it is important to look at new customers, it becomes increasingly critical to look at existing customers revenue and finding ways to increase revenue from existing customers.
Here are reasons on why expansion revenue is important:
Cost of Customer Acquisition
Acquiring new customers costs a lot of money and time because the process starts with lead generation then moving onto sales and then closure. With expansion revenue, the customer success teams can leverage existing relationships and sell to the existing customers with a better understanding of their needs. On average in SaaS companies, selling to a new customer costs 4-5 times more than it does to existing customers.
If it costs $1000 to acquire your customer and they pay $100 a month, it takes 10 months to recover the cost after which you start making profits in SaaS. This comes with a risk that if the customer churns at the end of the year you may or not make any profit at all. If there are up-sell and cross-sell opportunities and your able to bill another $50 a month, the payback period reduces by half. Expansion revenue helps hugely to reduce the payback period.
The fastest growing SaaS companies get 20-30% of their new revenue from existing companies as compared to slower growing companies. This makes sense because acquiring new customers takes a lot of time, money, and resources. Needless to say, you would need to focus on acquiring new customers first before you can focus on expansion revenue. But once you have a substantial number of customers you can start focussing on expansion revenue as well.
Compensating for Churn
Churn is inevitable in any SaaS business. If your churn rate is 5%, what you lose is not just 5% revenue but also the customer acquisition cost if the customer has churned before the payback period. This loss can be compensated to an extent by upselling or cross-selling to 20-30% of customers in the cohort.
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How to improve Expansion Revenue?
Expansion revenue can be improved by paying attention to it and thinking through some of the aspects mentioned below:
Product Value Metric
Position your value metric and pricing in such a way that as your customer grows, you grow with them. For example, A customer success product can be priced based on the number of customer success managers. As your customer gets more clients , they will recruit more customer success managers and in turn more licences.
So, think about your product and what is the value your customers get and how you can position it in a way that as they grow you also grow with them.
Add-ons are an effective way to price your product not too high to start with and including things that will not be needed by everyone. Features that will be required by only certain customers can be priced separately as add-ons. For example, API access or SSO are sold as Add-ons by many SaaS companies. CRM product companies sell a set number of contacts that can be saved in the product as part of the default price plan and for additional contacts they charge an add-on fee. So, think what in your product would not be required by everyone and can be positioned as an add-on.
Products Related to your customer base
Depending on your product, you will over time accumulate customers matching certain traits or part of certain industries. Once you have this customer base you can build other products that these customers can buy. Freshworks, a SaaS company, is a good example. They started with a support desk software but once they accumulated customers, they built other products like Fresh Chat that they would have cross-sold to their existing customers to start getting momentum for their new product.
Customer Success teams to lead the way
Customer success teams collaborate with customers to ensure they get the value for which they bought the product for. They review data like product usage, licence utilisation and work with key sponsors and decision makers to help get the best out of the product. They understand how customers use the product and what areas your customers struggle with.
They are in the best position to identify opportunities with your customers and show the value that they will get by upgrading or buying another product from you. Therefore, customer success teams are so critical in reducing churn and improving expansion revenue.
Acquiring new customers is what will make any SaaS business survive. However, to accelerate your business growth, expansion revenue plays an indispensable role. Invest in your customer success team and your customer success product to help tap potential opportunities within your customer base.