SaaS organizations are continuously trying to determine how to facilitate rapid and sustainable long-term growth. However, as customer expectations and market trends continue to evolve at exponential rates, generating and converting new prospective customers can be an extremely difficult process. Therefore, prioritizing expansion revenue as well as calculating and analyzing Net Revenue Retention has become an established standard across the SaaS industry.
Expansion revenue can be an extremely valuable asset for any business. Recent studies have shown that investing in new prospective customers is between 5 and 25 times more expensive than retaining old ones. Therefore, businesses must understand what expansion revenue is, how one can easily calculate and analyze Net Revenue Retention, how to facilitate Net Revenue Expansion and how to track the NRR walk.
What Is Expansion Revenue?
Expansion revenue refers to any organizational revenue that expands on a customer’s initial purchasing price or initial contract. For example, a customer that upgrades to a premium version of a particular product or package would be considered an increase in organizational revenue. Prioritizing expansion revenue can be one of the most effective and efficient methods to transform your business’s productivity and profitability in the long run.
The two primary catalysts of expansion revenue include:
- Upselling- This typically involves introducing existing customers to more expansive plans and product upgrades. With increased scalability comes an increased need to stay up-to-date with product upgrades.
- Cross-Selling: This process involves introducing existing customers to additional features and services that may be added to their existing plans and products. Sometimes, slight augmentations and modifications to existing plans with established credibility amongst consumers can be more effective than introducing entirely new products and services.
Expansion revenue can be extremely transformative for any business aiming to scale up operations without utilizing large amounts of scarce organizational resources to identify and convert new customers. Studies indicate that the probability of selling to an existing customer is 60%-70%, while the probability of selling to a new prospective customer is only 5%-20%. Therefore, prioritizing expansion revenue over generating new potential leads has numerous benefits.
Revenue generation typically involves a wide variety of costs associated with acquiring new customers, potentially impacting organizational profitability. Expansion revenue can almost completely eliminate these costs by increasing revenue generated from existing customers. By strategically identifying potential areas of expansion and further monetizing existing customers, expansion revenue can provide your business with an efficient and highly profitable method to increase revenue.
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What Is Net Revenue Retention?
Net Revenue Retention (NRR) is an extremely crucial SaaS metric that can measure the expansion revenue or recurring revenue generated by a particular customer. NRR is typically measured over a period of time that has already been established. NRR metrics take into account several factors, such as upgrades, downgrades, customer churn, and much more. These factors can help determine potential organizational growth from expansion revenue from existing customers.
This metric is vital for businesses as it can be a tool to help promote long-term sustainable revenue growth, customer retention, and customer success. Customer retention and customer success are some of the most important aspects of any successful business. Therefore, NRR can help your business determine potential areas of expansion revenue potential and areas that may require more attention. NRR can also indicate better prospects for organizational stakeholders and investors, stable predictability, future scalability, and much more.
Therefore, your business must constantly strive to improve its NRR over time. Reducing customer churn can significantly decrease friction in user experiences and customer satisfaction levels. This can be done by consistently upgrading user experiences, monitoring pricing strategy renewal rates, investing in feature upgradation, and much more. By analyzing downgrades and product cancellations, your business can identify underlying trends that could impact your NRR.
Why is Net Revenue Expansion Important?
1. Impacts Organizational Growth
Constant organizational growth is one of the primary factors to ensure the survival of any modern business. Your business requires a stable foundation on which to support further consequent growth. Your business can find new ways to facilitate growth and increase profitability with a concrete infrastructure and architecture.
Net Revenue Expansion is a major factor in long-term, scalable organizational growth. A high NRR metric can indicate that your business is constantly promoting compounding revenue each year, resulting in massive growth in productivity.
2. Crucial For Future Investment
Before investing in a business, investors typically pay extremely close attention to customer success levels. A key factor of customer success involves whether or not existing customers continue to upgrade or modify their plans to expand their individual revenue generation.
NRR can help investors analyze organizational stability, predictability, and scalability, as it is a key indicator of customer success levels. NRR can also help potential investors analyze a business’s potential growth. These factors can help facilitate consequent decision-making processes regarding valuations, acquisitions, and much more.
3. Facilitates Consequent Departmental Scalability
Net Revenue Expansion can provide your business with valuable information and insights that can be leveraged to facilitate further growth across various departments. For example, if the NRR of your business is above 100%, this indicates compounding revenue, leading to a growing valuation. This indicates that a business has a strong customer base and can allocate resources and manpower to other complex business processes.
However, suppose a business’s NRR metric is below 100%,in that case, it indicates excess customer churn and that more comprehensive and holistic strategies need to be established and implemented to increase expansion revenue. Therefore, NRR is an extremely important aspect of directing future operations as well as the allocation of resources. Net Revenue Expansion can also take some pressure off of sales teams by determining whether or not your business has an established and loyal customer base.
4. Improves Business Valuation
Since NRR is such a powerful indicator of customer success and retention, it is often utilized to determine business valuations. Business valuation is an extremely important factor that may potentially affect employees, customers, and investors in the long run. Therefore, your business must consistently calculate and analyze NRR to understand the effects of current expansion revenue on future business valuations.
How To Calculate Net Revenue Retention:
Net Revenue Retention can be calculated using the following formulas:
(Total Revenue – Lost Revenue) / Starting Amount
[Contraction MRR – (Churn MRR + Expansion MRR)] / Starting MRR
- Total Revenue = Starting Recurring Revenue + Account Expansion
- Lost Revenue = Revenue Churn + Account Contraction
- Starting MRR: it is the amount that indicates how much recurring revenue the company was receiving from its customer base in the previous month.
- Expansion MRR: it is the amount that indicates how much new revenue was generated from existing customers in the current month (from upsells and cross-sells)
- Contraction MRR: it is the amount that indicates how much revenue was lost from existing customers (downgrades)
- Churn MRR: it is the amount that indicates how much recurring revenue was lost in the customer churns.
What is the NRR Walk, and How Can It Transform Customer Success?
The NRR Walk is a graph describing the various factors involved in achieving optimal customer success levels. The NRR Walk involves gradually increasing Annual Recurring Revenue (ARR) through a gradual process of customer success initiatives and consequent sales processes. The NRR walk includes reducing customer churn, prioritizing upselling to increase net retention, and gradually increasing ARR by increasing NRR over time. The NRR Walk can enable employees, investors, and other stakeholders to clearly understand the road to customer success, customer retention, and increased expansion revenue, as well as a clear and comprehensive strategy for how to achieve it.
Prioritize Expansion Revenue and Increased Net Revenue Expansion With The NRR Walk:
With every SaaS business prioritizing increased productivity and profitability, your business must recognize the value of prioritizing expansion revenue and increased net revenue expansion. Net Revenue Expansion can help facilitate long-term organizational growth, encourage potential financial investment, facilitate departmental scalability and improve business valuation.
Furthermore, calculating and carefully analyzing net revenue retention metrics, as well as following the NRR walk, can be extremely effective methods to help your business increase expansion revenue and ultimately increase your bottom line.26
Therefore, the aforementioned step-by-step guide can help your business understand what expansion revenue is, why net revenue expansion is crucial for organizational development, how to calculate net revenue retention and how to undergo the NRR walk.
Shivani is a talented CS manager with the skillsets to elicit, scope and manage end-to-end B2B SaaS project delivery. She has a keen interest in depicting her learnings in customer success by writing resourceful blogs and articles.
Published September 26, 2022, Updated April 27, 2023