The Power of Expansion Revenue In SaaS: Drive Sustainable Growth For Your Business
If you think about growing revenue for your SaaS business, what usually comes to mind? Is it acquiring new customers?
If your answer is yes, you’re not alone. After all, growing your customer base is the main way to grow your recurring revenue (and the fastest way too).
But what about existing customers? Can’t you grow your recurring revenue from them too?
You sure can, and that’s where expansion revenue in SaaS comes in.
In fact, your expansion revenue is an important indicator of customer satisfaction and loyalty. If customers are happy with your SaaS product, they’ll be willing to spend more — and that’s exactly what expansion revenue reflects.
In this article, we will talk all about expansion revenue in SaaS — what it is, where it comes from, how to measure it, how to drive more of it, and so much more.
What Is Expansion Revenue?
Simply put, expansion revenue is the additional revenue you generate from your current customers, either by upselling or cross-selling.
This is different from new customer revenue, which comes from signing up new customers for your SaaS product.
Expansion revenue, on the other hand, comes from existing customers who decide to upgrade or purchase additional services or features that you offer in addition to your core product.
Let’s talk about where your expansion revenue can come from:
SaaS upselling is the process of convincing your current customers to upgrade from their current plan to a higher-tier plan that offers more features and better value.
For example, let’s say you have a customer who is currently on your Basic plan (which offers 50 GB of storage). You can upsell them to the Standard plan (which offers 100 GB of storage), giving them more benefits from your SaaS product and generating additional recurring revenue from this customer.
Cross-selling, on the other hand, involves selling additional products or services that are related to your core product.
For example, if you sell a marketing automation solution, you could cross-sell your customers an integrated social media marketing solution or an email marketing service under your brand.
How To Measure Expansion Revenue
Measuring your expansion revenue is key to understanding the health of your SaaS business and making data-driven decisions. After all, if you don’t measure it, you won’t be able to track its impact on your bottom line.
So how do you measure expansion revenue? Here are two metrics that you can track:
Expansion MRR and Expansion ARR
When you track the overall recurring revenue of your SaaS company, you would look at monthly recurring revenue (MRR) and annual recurring revenue (ARR), right?
Well, you can do the same thing for expansion revenue — track expansion MRR and expansion ARR.
Expansion MRR is the monthly recurring revenue generated from your current customers who have upgraded or purchased additional products or services. Similarly, expansion ARR is the annual recurring revenue generated from existing customers who have done so.
To find out how much expansion MRR or ARR you have, you need to consider three types of recurring revenue:
- Starting MRR or Starting ARR: The MRR you have at the start of the month or the ARR you have at the start of the year.
- New MRR or New ARR: The additional recurring revenue you generate from new customers.
- Total MRR or ARR: Your overall recurring revenue at the end of the month or year.
To calculate your expansion revenue, simply subtract your starting recurring revenue and new recurring revenue from your total recurring revenue.
For example, let’s say you have a monthly recurring revenue of $100,000 at the beginning of the month. By the end of the month, it had grown to $115,000, with $10,000 of that amount coming from New MRR.
Your calculation for your expansion MRR would look something like this:
$115,000 – $100,000 – $10,000 = $5,000
Expansion MRR Rate
More than just tracking how much expansion revenue you are making month on month, you should also measure how much it is growing. Doing so will tell you whether your upselling and/or cross-selling are improving or not.
This is where your expansion MRR rate comes in. This metric compares your current expansion MRR to your previous one.
To calculate your expansion MRR rate, take the difference between your expansion MRR this month and the one last month. Then divide the resulting value by last month’s expansion MRR.
For example, let’s say that last month, you made an extra MRR of $5,000 from upsells and cross-sells. Then this month, it went up to $6,000.
Your computation for your expansion MRR rate would be something like this:
($6,000 – $5,000) / $5,000 = 20%
Since your expansion MRR can vary from one month to another, it’s possible to have a lower expansion MRR in a month compared to the previous month.
In such a case, you would have a negative expansion MRR rate.
Now, for SaaS businesses, the ideal expansion MRR rate is around 10% to 30%.
As we mentioned earlier, your expansion MRR rate measures how well you are improving in terms of your upselling and cross-selling efforts.
Generally speaking, a high positive expansion MRR rate would indicate that you are indeed improving. Conversely, a negative expansion MRR rate for a few consecutive months might be a wake-up call to revisit your upsell or cross-sell strategy.
How Expansion Revenue Impacts Other Growth Metrics
If you’re familiar with some of the growth metrics that a SaaS business should track, then you know that some of them literally put expansion revenue into the equation.
Now, to put the importance of expansion revenue into perspective, let’s look at how it affects other important SaaS growth metrics:
Net New MRR
Your Net New MRR measures your actual growth in MRR considering both expansion and churn.
Calculating it involves adding your New MRR and Expansion MRR, then subtracting your Churn MRR, which is the recurring revenue you lose due to customer churn.
For example, let’s say you have a New MRR of $10,000, an Expansion MRR of $6,000, and a Churn MRR of $3,000. That means your Net New MRR is $13,000.
As you may guess from the computation, a higher expansion revenue leads to a higher Net New MRR.
Net Revenue Retention (NRR)
Your Net Revenue Retention (NRR) tracks how much recurring revenue you retain from your existing customers from month to month.
In other words, it is the percentage of MRR that you keep from existing customers compared to the previous month.
To calculate it, you need to add your Starting MRR and Expansion MRR, then subtract your Churn MRR and Contraction MRR (The recurring revenue you lose due to downgrades). Then you divide the resulting figure by your Starting MRR.
Like your Net New MRR, your NRR will also benefit from an increase in expansion revenue.
SaaS Quick Ratio
The SaaS Quick Ratio is another SaaS metric that enables you to compare your additional revenue with the losses in your recurring revenue.
Computing it involves adding your New MRR and Expansion MRR, then dividing the total with the sum of your Churn MRR and Contraction MRR.
An increase in expansion revenue will also boost your SaaS quick ratio.
And a high SaaS quick ratio means you are successfully making up for churn and contraction with the help of your customer acquisition and expansion efforts.
Average Revenue Per User (ARPU)
As the name suggests, your average revenue per user (ARPU) is the amount of money you make from each individual customer.
You can calculate it by dividing your MRR by the number of customers you have in a given period. So, if your MRR is $100,000 and you have 1,000 customers, then your ARPU would be $100.
Now here’s where expansion revenue comes into play: Your ARPU goes up as long as you are able to generate more revenue per user through either upsells or cross-sells.
That means that even if the number of customers remains constant, an increase in expansion revenue will push the overall ARPU higher.
Customer Lifetime Value (CLV)
Your customer lifetime value (CLV) measures the total revenue you can generate from a single customer over the course of their relationship with you.
To calculate your CLV, you simply multiply your ARPU by your average customer lifespan (or the average length of a customer’s relationship with you).
Since your ARPU is one of the main factors here, an increase in expansion revenue will also impact your CLV.
This means that if you’re able to upsell or cross-sell successfully, then your CLV will go up as well.
CAC Payback Period
You can calculate it by dividing your CAC by your ARPU.
The shorter your CAC Payback period, the better. And based on its formula, we can see that it is inversely proportional to your ARPU.
This means being able to increase your expansion revenue will shorten the time you need to recoup the cost of acquiring your customers.
How To Drive More Expansion Revenue For Your SaaS Business
More than just measuring how much expansion revenue you’re making and how much it’s impacting your growth, you may be more interested in learning how you can drive more of it.
At its very foundation, increasing your expansion revenue is really about having a more effective upsell and cross-sell strategy.
Here are some tips on how you can improve these efforts:
1) Establish Upsell Or Cross-Sell Triggers
When it comes to upselling or cross-selling, you just can’t make an offer to random customers. That would be too intrusive, and your customers might think you are just trying to take advantage of them.
Instead, you can set up triggers that may indicate that a customer is ready for a higher-tier plan or one of your other product offerings.
For example, let’s say you have a file management platform with different storage allocations for each plan. Imagine you have an existing customer subscribing to the “Basic” plan which offers 50 GB of storage and you’re looking to upsell them to your “Standard” Plan, which gives them up to 100 GB.
You could set up an alert when they have used at least 40 GB of storage. This way, you can make sure that your customer has already experienced the benefit of their current plan and may actually need the next one.
The idea here is that your customers’ business should also grow as they achieve their goals with the help of your SaaS product. If they are indeed growing, so will their needs. And they will inevitably need to upgrade.
A good upsell strategy relies on knowing when they are ready for that upgrade and how to offer it.
With that, let’s move on to our next point.
2) Offer Your Upsells and Cross-Sells Based On Product Usage
As we just discussed, knowing the best time to offer an upgrade or a new product is key to a good upsell or cross-sell strategy.
So how do you know when the time is right?
The answer lies in understanding your customers’ product usage. You have to be familiar with the features they are using and how often they use them. This will allow you to better gauge when it’s time for an upgrade or a new product.
You can even take things one step further by offering upsells and cross-sells that are tailored according to their usage patterns.
For example, you notice that an existing customer is using a certain feature more often than the other. You can use this to offer them an upgrade to the plan that offers unlimited access to that particular feature.
This way, you don’t just present all of your current customers with a generic offer. Instead, you make sure that each customer is presented with a tailor-made offer that highlights their specific needs and usage.
What’s more, this ensures that your upsell or cross-sell offer is actually relevant to their needs.
It won’t be just about you trying to increase your revenue. But more importantly, it will be about looking out for their needs and showing how an upgrade can give them even more benefits.
3) Give Away Free Temporary Upgrades
Sometimes, an existing customer won’t realize their need for an upgrade until they actually experience what it’s like.
To give them a taste of what it feels like to use the features included in higher-tier plans, you can offer them free temporary upgrades. You can set this up so that they will be able to try out all the features for a certain period of time without having to pay anything.
This way, customers get an idea of how those extra features could help their business.
And if your temporary upgrade successfully delivers significant value to your customer, they may even want to make it permanent.
What’s more, you could also package your temporary upgrade as a reward for having high engagement with your product or being a loyal customer. This way, you would be building your relationship with them AND increasing the likelihood of them upgrading their plan.
Two birds with one stone!
4) Build A Proactive Customer Success Team
Now, this strategy isn’t necessarily exclusive to upselling and cross-selling. It deals with the bigger picture of providing an awesome user experience, which leads to your customer’s business growth, which consequently leads to the need for an upgrade.
Customer success is all about proactively helping your customers make the most out of your SaaS product.
The main goal is to ensure that they achieve their goals and desired outcomes with the help of your solution.
To do this well, a customer success manager should be able to provide tailored recommendations on how to reach your customer’s goals much faster. And as we talked about earlier, giving tailored advice or offers would first need you to monitor their product usage and engagement.
This helps you know when to intervene and what specific features a customer might need.
A solid customer success team will help you not just retain your customers, but also help them grow to a level where they would need to upgrade their subscriptions or buy your additional products.
5) Make It Easy To Upgrade
When your current customers do decide to upgrade or buy your additional product, the process has to be as frictionless as possible.
If your customers have to jump through many hoops, you might end up frustrating them and make them choose not to carry on with the upgrade. Or worse, they may choose to go with one of your competitors instead.
So instead, focus on providing them with an intuitive UI that allows for a quick and easy upgrade process that they can access anytime, without the need to reach out to your team.
Even better, you can make it automatically appear when they already urgently need an upgrade.
Let’s take an example from the earlier one where you have a file management solution. Imagine that one of your customers needs to receive and store a large file that is crucial to their business.
However, their current plan is almost at its limit and can no longer accommodate the file. Deleting their existing files isn’t an option either, since they are also essential for their business. So now, your customer has no other choice but to upgrade their plan.
Now, imagine that the moment they try to store the file, your platform gives them an automated prompt saying that they have reached their plan’s limit. But at the same time, it’s also showing them that they can instantly upgrade to a higher plan in order to store more files.
So your customer clicks on the prompt, gets directed to an upgrade page, confirms their credit card information, upgrades their subscription, and stores the file — all in a few clicks.
Now, your customers got the exact feature they needed without having to go through any hassle. This makes them more likely to stick with your SaaS product even if they could find a similar solution elsewhere.
Final Thoughts About Expansion Revenue In SaaS
Expansion (upselling and cross-selling) is one of the most important factors in a SaaS company’s revenue growth.
Of course, the new revenue resulting from new customer acquisition efforts will still bring in the bulk of your additional recurring revenue. But then again, sustainable growth for a SaaS business comes from the success of your customers and solid relationships with them.
If your SaaS product and your team are successful in helping your customers achieve their goals, expansion revenue is inevitable.
So more than just counting your expansion revenue and the other metrics associated with it, your focus should be on customer retention and providing an excellent user experience. Expansion revenue will just follow.
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