What Is Expansion Revenue? Why Is It Critical for Long-Term SaaS Growth?

What Is Expansion Revenue? Why Is It Critical for Long-Term SaaS Growth?

Expansion revenue is the revenue that comes from existing customers by means of upselling, cross selling, or anything more than the initial purchase.

Expansion Revenue
Expansion Revenue

To generate revenue for a business, people think sales are the key. However, there is another way to improve your business. A great way of revenue generation that is not utilised is expansion revenue. Expansion revenue is something that needs to be improved and tracked. It is necessary for customer retention and has proven to be cost-effective as compared to bringing in a customer.

Expansion revenue is when revenue increases by expanding deeper into existing customers. It needs to be tracked to get the best results. It has to be analysed with metrics for growth to understand the complete picture. In a subscription economy, relationships are made in the revenue model and so if they don’t like what you’re selling, they will churn.

What is Expansion Revenue?

Expansion revenue is revenue that is generated over and above the customer’s initial contract or purchasing price. Expansion MRR is the additional monthly revenue generated by customers who have signed up for additional products.

The main drivers of expansion revenue are-

  • Upselling: Upselling to customers is basically upgrading them to larger plans to suit their needs better.
  • Cross-selling: Cross-selling is when you share additional features or services with customers to help them use their existing product in a better manner. Something that augments the services they have.

Expansion revenue is great for business as it helps generate revenue from existing clients. It is profitable in the long run and these customers will additionally grow revenue to hasten growth.

How do you grow your Expansion Revenue?

To grow your expansion revenue, you need to provide your loyal customer base value. This is the key to upselling or cross selling. Here are some methods to create a value metric.

Identifying the core value of the product

Finding the solution that customers get from the product will help increase sales and value from that solution. Whatever makes customers get more value is to be recognised as the core value of the product.

Understanding customer journey

Understanding customer journey is also important to expand. If you trace customer journey and how customers react, you can find scope for improvement with respect to products.

Offset different products at different points

When prices are set for products, buyers need to be ready to pay. The willingness to pay needs to be tested against different price points. Cross sells increase revenue and when customers get products that compliment their purchases better, they accept that price point.

Take customer feedback

Customer feedback is a great way to understand what customers want. You can find customer pain points and problems and convince them to use your solutions as a better fit.

Ensure upgrades are easy

To get expansion revenue, you need to ensure upgrading is easy. If the process to move is long and cumbersome, chances of customer going ahead are bleak. An automated upgrade process will ensure a great customer experience. Finding some deals or attractive trial options will help make the process stronger.

Types of Expansion MRR

Additional revenue is generated when any of the following happens

  • Upselling that is moving from a lower priced plan to a higher one, a plan with less features to one with more, from a free plan to a paid one
  • Add-ons are those products not part of the initial purchase or current subscription plan.
  • Cross-selling is purchase of additional products non-core mostly
  • Reactivation is when subscriptions are reactivated

How to calculate Expansion Revenue?

Expansion revenue is the sum total of the MRR from cross-sells and upsells. It does not include new revenue from customers recently acquired. Expansion MRR at month end – Expansion Revenue divided by Expansion MRR at the beginning multiplied by 100.

How does Expansion Revenue affect metrics?

Increasing expansion revenue can help improve other SaaS metrics. The metrics affect your company health and growth metrics. A growth in expansion revenue will decrease MRR churn and increase customer LTV.

MRR Churn

The net MRR churn is the gap between MRR lost and MRR from expansion revenue. When MRR from expansions is more than what is lost, there is net negative churn. Net negative churn is when your company makes more money from customers than it is losing from the churned ones.

Lifetime Value

Higher payments mean higher LTV. When customers pay more than they used to, their life time value increases as they will contribute more over their lifetime. For example- If a customer subscribes to a package at $150/month and stays for 3 years without any upgrades, their LTV is $5400. However, if they upgrade to a plan after a year, their lifetime value increases.

How Expansion Revenue Can help with long-term growth?

It will help expand business and improve customer satisfaction.

  • Monitoring customer data and listening to users will help reduce downgrades and increase more upgrades. Upselling will also reduce churn and understand customers better.
  • MRR Churn inhibits growth in SaaS firms. Some churn is inevitable and the only thing that can help is expansion.
  • This MRR shows customer loyalty and satisfaction which expands customer lifetime value.
  • Expansion MRR does not involve any CAC or customer acquisition costs making it a great way to propel growth

Bottom Line

An increase in expansion MRR is great. However, one should not rely solely on this metric. If churn s more, then this growth is misleading. So, a balance of all metrics should be kept in mind to grow. Expansion revenue needs to be an important part of the growth strategy in any business. Once customers are happy with a product or service and are receiving the best customer experience, they will be in it for the long run. When you monitor and improve expansion revenue, you can focus on overall growth of the firm. Note that only customers who like the product and don’t want to churn think of choosing add on’s, cross selling or other services in the first place.

So ensuring a good customer experience and understanding customer pain points will help increase expansion revenue.

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