What is expansion revenue in the context of a growing SaaS company? We outline how your Customer Success team can track, calculate and strategize around expansion revenue below.
What is expansion revenue?
Expansion revenue is additional recurring revenue from existing customers. It primarily falls under three categories: upsells, cross-sells, and add-ons. It’s tracked or compared on a monthly basis. Expansion revenue doesn’t include any revenue from new customers in the same time period (note: renewing a customer contract also doesn’t count towards expansion revenue totals).
Expansion revenue is also known as monthly recurring revenue (MRR) expansion, increasing annual recurring revenue (ARR) growth, or customer expansion.
How to calculate your expansion revenue
The goal in calculating expansion revenue is to accurately track upsells, cross-sells, and add-ons to see if your business is growing. The expansion revenue equation is simply subtracting monthly recurring revenue from the end of one month compared to the beginning, and then dividing by that beginning number to find a percent increase or decrease. See below for the equation and an example.
Expansion revenue equation and example
- Your business enters January with an MRR of $2,800.
- Your business exits January with an MRR of $3,000 from the same customers at the start of the month.
- Your expansion revenue is 7.1%.
Learn more about MRR (monthly recurring revenue), its variables, and how best to track long-term.
What are good expansion revenue targets?
SaaS businesses agree that a general expansion revenue rate of 10-30% is considered good and steady growth. Although some of the highest performing (and larger) SaaS companies gain over 60% of new MRR from expansion revenue, according to the Finmark SaaS Metrics Benchmark Report.
And the payback to focus on existing customers far outweighs that for new customers. A recent Pacific Crest Survey showed the median cost to acquire a dollar of annual contract value (ACV) for upsells and cross-sells was significantly less than that for new customers. Put another way, it took companies approximately one quarter to earn back their costs attributed to expansion, versus over a year for those costs in acquiring new customers.
Any targeted revenue growth is usually interlocked with efforts to increase customer lifetime value and shorten the business’ customer acquisition cost (CAC) payback period. So how can your Customer Success team leverage all of these metrics to improve expansion revenue?
Learn more: how customer acquisition and retention are cornerstones of any company’s revenue.
How Customer Success can leverage expansion revenue
Expansion revenue can significantly reduce or mitigate a SaaS company’s churn rate. The road to increased revenue and reduced churn is paved by a Customer Success team’s focus on personalization, education, and where customers are along their journey. A solid expansion revenue strategy does not push additional products and features without the above considerations.
Tactics to build or improve your expansion revenue strategy
Let’s review some tactics for your team’s expansion revenue strategy:
- Capture customer lifetime value metrics. As we mentioned earlier, tracking CLV and CAC will inform how you build, adjust, or tackle your expansion revenue strategy.
- Segment customers into cohorts for effective targeting. Remember that where customers are in their customer journey is pivotal for what they might need next – track goals, preferences, and purchase history to build a better picture.
- Personalize offers and incentivize upgrades. Blanket promotions will work against the relationship building and feedback you’ve built with existing customers. But offers or upgrades that match their evolving needs may do the opposite (next level: recruiting engaged customers into a loyalty program).
- Set product pricing based on customer needs first. The more you know about your customers (based on activities like segmentation, CLV metrics, and feedback), the more you can tailor pricing for existing and future customers based on their actual needs. Adjustments include tiered options, gated features within the product, or features-focused packages.
Additional resources on expansion revenue and SaaS metrics
- Who owns customer renewals and expansions: Customer Success, sales or account management?
- How to improve your customer expansion management strategy
- Is it magic, or ChurnZero? SalesIntel reveals the secrets of its expansion success.
- Leveraging Customer Success to Increase Expansion Opportunities
- SaaS retention benchmarks: How does your company compare? with Rob Belcher of SaaS Capital