Convincing existing customers to spend more is cheaper and easier than acquiring new customers. Discover expansion revenue and learn how to grow it.
Nothing indicates that your subscription business is healthy and growing than increasing your average transaction size with existing customers. It shows that your customers are here to stay and want more of your product.
Revenue expansion indicates product/market fit, which every subscription business covets. This article explores expansion revenue and discusses how to achieve it sustainably.
What is expansion revenue?
Expansion revenue refers to additional recurring revenue generated from existing customers. It is revenue beyond a customer's original subscription plan or contract.
'Expansion' revenue means extra revenue generated from the same sources as before, meaning it should not include revenue from newly acquired customers whose recurrence has yet to be established.
Expansion revenue is considered such if it is from the same customers as the previous period, indicating that the same customers upgraded or renewed their subscriptions with add-ons or complementary products or services.
In a subscription business, expansion revenue is generated using three main sales strategies: upselling, cross-selling, and add-ons.
Upselling involves convincing customers to upgrade to a higher-value subscription plan or tier. That tier naturally comes with more features, greater access, or a larger supply.
Cross-selling involves recommending related and supplementary products to the ones on a customer's current subscription plan. Add-ons are features or extra products that customers can add to their plans.
Products you could recommend as cross-sells include those that other customers on the same plan have added to their plan.
Therefore, successful cross-selling requires a deep knowledge of your customers' needs and purchasing habits. That knowledge enables you to segment and target specific customers with cross-sell offers accurately.
Why every recurring revenue business should track its expansion revenue.
Here's why it is strategic to track expansion revenue.
Enables more accurate revenue attribution.
Tracking expansion revenue enables you to assess the contribution of your existing customers to your revenue growth. It isolates that portion of your income generated from new customers.
Accurate revenue attribution enables you to make the right decisions about growing revenue. For example, not acknowledging the contributions of existing customers to revenue growth can lead to misleading conclusions about the effectiveness of your lead generation.
Knowing what new and existing customers are contributing to your revenue enables you to optimise your marketing spend. You would rather offer incentives for your current customers to upgrade than persist with lead generation tactics with low returns.
Increase customer lifetime value.
Subscription businesses looking to increase customer lifestyle value (LTV) and lower customer acquisition costs (CAC) can do so more sustainably by increasing expansion revenue.
There are two ways to grow your business's revenue: recruiting new customers and getting your existing customers to spend more. The second strategy is a revenue expansion strategy.
Between the two sales growth strategies, increasing revenue from existing customers is easier and cheaper than acquiring new customers. Expanding revenue through upsells and cross-sells makes individual customers more profitable while reducing the urgency for acquiring new customers.
Reduces the lead generation burden on your business.
Estimates indicate that it is up to seven times more expensive to attract new customers than to retain existing ones. Even though you may occasionally offer discounts, you typically don't have to spend money to upsell or cross-sell existing customers. This makes revenue expansion a more sustainable, financially efficient way to grow revenue.
Expansion revenue also has a positive effect on your net churn rate. Expanding your revenue every month improves your net revenue churn. And if you don't lose MRR at the same rate, you will ultimately achieve a net negative revenue churn.
Makes it easier to reach your revenue goals.
Expansion revenue growth indicates that customers feel your product delivers sufficient value. Customers naturally increase their usage of a product if it meets their needs and value expectations. It is also a sign that there are people like them that you could target and convert into customers.
Hence, expansion revenue makes it easier to reach your revenue goals. Growing revenue is as easy as keeping your existing customers happy.
How do you calculate expansion revenue?
Expansion revenue sums MRR from upsells, cross-sells, and add-ons. To calculate it, you must first determine the period in which the recurring revenue was generated. Most recurring revenue businesses track MRR (monthly) and ARR (annual) expansion.
MRR expansion is practical for determining short-term revenue growth and the effectiveness of your marketing strategies. ARR expansion gives you a more comprehensive understanding of the impact expansion revenue is having on your business.
Expansion revenue formula.
Here's the formula for calculating expansion revenue:
(Total MRR at the end of the month—MRR at the start of the month) / MRR at the beginning of the month X 100.
This formula gives us the portion of monthly recurring revenue directly attributable to revenue expansion tactics. That portion is expressed as a percentage of the total MRR.
To illustrate with an example:
Suppose your SaaS company generated Ksh 12 million MRR in January and records a total MRR of Ksh 18 million by the end of February. In that case, the expansion MRR calculation will be as follows:
(Ksh 18,000,000 - Ksh 12,000,000) / Ksh 12,000,000 X 100
6,000,000 / 12,000,000 X 100
50%
The above revenue data indicates that your expansion MRR grew by 50%. The data also shows that 30% of the revenue generated in
February should be attributed to your revenue expansion strategies.
While expansion revenue helps you determine the effectiveness of your revenue growth strategies, it is not an accurate indicator of revenue churn. For that, you need to calculate your net revenue expansion by accounting for contraction revenue, which is in MRR revenue lost to subscription cancellations and plan downgrades.
How do you drive expansion revenue?
Growing expansion revenue requires a good product and reasonable pricing. No amount of discounts and good marketing can grow sustainable recurring revenue out of a poor-quality product that does not solve customers' problems.
Therefore, before you consider selling your existing customers on a higher-value plan, ensure you provide extra value on what they are getting on their current plan. Tricking customers into pay you more for no additional value devalues your relationship.
Consumers are very good at gauging value; it's what they do when making daily purchases. If they don't get fair value for their money, they will downgrade to their previous plan just as fast as they upgraded. The low value of the higher plan could even spook them into cancelling their subscription entirely, increasing your revenue churn instead of lowering it.
Below, we discuss a few more ways you can boost expansion revenue:
1. Use a tiered pricing strategy.
Upselling is a viable revenue expansion strategy only where there is a choice between two or more subscription tiers or plans. These tiers are separated by the level of value or access they offer. Each higher tier includes extra features, meaning each attracts customers with a particular needs profile.
Similarly, for cross-selling to be practical, you must offer complementary products beyond your primary plan. Even though offering one basic plan removes upselling as a revenue expansion strategy, it allows you to focus on delivering an exceptional customer experience.
Successful cross-selling enables customers to get more out of your product, which increases engagement with them and boosts their loyalty to the brand.
2. Segment your customer base.
Segmentation is the process of dividing customers according to common characteristics. It requires a thorough understanding of the customers' needs and interests.
That knowledge tells you which customers might use your products, each of which counts as an upsell opportunity. Furthermore, you can use it to align your pricing with customers' needs.
An added benefit of segmentation is it enables you to separate your customers between recreational and professional users and ascertain which ones are more likely to upgrade their plans.
To increase their needs and potential to upgrade to a pro plan, recreational users need support and education on the possibility of turning their hobbies or pastimes into businesses.
3. Promote cross-selling with product bundling.
Segmentation groups customers according to specific characteristics for easier targeting. On the other hand, product bundling groups complementary products to consolidate value and make it easier to cross-sell them to existing customers.
Beyond increasing the average order value and boosting expansion MRR, product bundling enables you to clear slow-selling stock, simplify purchasing for customers, and leverage the popularity of your other products to introduce new products.
4. Use customers's feedback to continually develop new features.
To continually grow your expansion MRR, you must engage in a process of perpetual innovation, improving the product and introducing new features and complementary products.
However, this strategy will not drive the revenue growth you expect if it ignores or does not seek your existing customers' feedback. Customers are only willing to pay for additional features that provide extra utility.
The only way to develop features that grow your expansion revenue is to seek your customers' input. Survey them to find out how you could improve your core products and what complementary products they would pay for.
5. Prioritise renewals.
Prioritising renewals is a surprisingly effective way to increase expansion revenue.
Customers sometimes do not renew their subscriptions because their current plan is limited in scope and features, not because the product is poor.
Such customers must be classified differently from those who cancelled their subscriptions. Though churned, consider them simply inactive and target them with upsell offers. Assume they wanted more from their subscription, something they could get on a higher plan. Offer them a discount to come back on a higher plan.
6. Reward loyalty with differential pricing.
Your most loyal customers are easily the most valuable to your business. To appreciate them for their support, consider rewarding them with a discount.
A better reward you could leverage to expand your MRR is offering them discounted pricing if they upgraded to a higher plan.
Those considering an upgrade will certainly take you up on the offer.
Besides the MRR boost, this builds a stronger connection with customers who will feel appreciated for their loyalty.
Remember to clarify that this offer is available only to long-term customers. They must know that the differential pricing offer is a reward for their loyalty.
Boost expansion revenue tracking and attribution with Intasend.
Subscription businesses need data on customer purchase trends to develop effective revenue expansion strategies.
The many customer touchpoints in a subscription business are all potential sources of data you can leverage to improve the subscription experience and expand revenue. However, you need an automated system to collect that data cost-efficiently.
Using Intasend's automated billing and subscription management software, you can streamline billing, plan creation, subscription management, and payment collection and collect valuable data on your customers.
From the data the software collects, you can generate reports on:
- how many customers are on each plan, and for how long,
- which features are most popular,
- total monthly plan upgrades and downgrades.
You can synthesise this information to improve your overall understanding of your customers so you can develop effective revenue expansion strategies.
Sign up with Intasend to automate recurring billing, streamline subscription management, and leverage the loyalty of your existing customers to expand your MRR.
