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The global SaaS industry was valued at $237 billion and it shows no signs of slowing down. With promises of passive income, the ease of scaling and the increasing availability of no-code tools, the interest in SaaS is growing with each passing year. As a (aspiring) SaaS founder, you might be wondering how to get a slice of that billion-dollar pie.
Sometimes, the answer is not in acquiring new customers - it’s in getting more from your existing customers. SaaS companies can do this through expansion revenue. Today, we’re going to show you what expansion revenue is, how to calculate it and increase it for your business.
Expansion revenue is the additional recurring revenue you can generate from your current customers. Since they are already paying for your SaaS products, you can use add-ons, upsells and cross-sells to help them get more value out of the product. As a result, you get additional revenue for your business and your customers are happier with the overall product.
Note that new revenue from newly acquired customers does not go into the expansion revenue figure.
Other names for this phenomenon include MRR expansion and ARR (annual recurring revenue) expansion.
Since acquiring a new customer is usually 5-7x more expensive than retaining an existing customer, expansion revenue is an excellent way to reduce costs and boost proper revenue growth.
If you already have a good system in place for tracking your key SaaS metrics, calculating expansion revenue is pretty straightforward.
All you have to do is take the monthly recurring revenue from a specific month and divide it by the same monthly recurring revenue (from the same, existing customers) after the expansion, at the end of the month.
In other words, if your MRR is $10,000 and at the end of the month, you get $11,000 from the same customers (after upsells, cross-sells and more), your expansion revenue is 10%.
A good value for expansion revenue is anywhere from 10 to 30% for a SaaS business. However, growth at all costs may actually be detrimental to your business. If you see that you are struggling with churn, a focus on retention instead of expansion might be a better strategy.
Expansion revenue can help you increase your MRR, reduce churn and improve the overall health of your business. Using forecasting tools, expansion revenue can help in boosting your MRR, reduce churn, and enhance the overall health of your business. Here are some methods you can use, regardless of your pricing structure and industry.
An embedded analytics dashboard is an add-on to your SaaS product that shows your customers key performance indicators about how they use your product.
For example, if you run an email marketing software, you can create a dashboard that shows metrics such as:
The main benefit of using analytics dashboards is that the information is readily available in your app, updated in real time, and tailored to the user who is looking at them.
Not only will this show your customers how they are using your product, but it will also make them realize the value they get from it even sooner.
Usually, an analytics dashboard costs a lot of money to build as it requires developer resources. But with Luzmo, you can create an analytics dashboard in hours instead of weeks.
In order to generate expansion revenue, you must first understand the core metrics behind your SaaS business. These are some great starting points:
By measuring and analyzing these numbers, you can find out what drives your customers to purchase and stay with you. For example, by taking a better look at customers with the top customer lifetime value, you can see what to replicate to increase profitability even more in other customer segments.
Want to know what to build next in your product and drive more expansion revenue? There’s a good chance your customer success team already knows what that next item should be. Your customers won’t be shy about expressing their thoughts, especially if they really like (or dislike) your product.
By collecting feedback from your customers, you can collect information about bugs and potential fixes, but even more importantly, feature requests. Your customers will often tell you exactly what they need in order to be even happier with your product. And many times, they are willing to pay more to have that feature or additional recommended product rather than switch to a competitor or use something like Zapier to do the job.
You can automate the entire process of collecting feedback with an app such as Productboard. Or if you’re on a budget, you can even collect feedback for free with something as simple as a Trello board or any other free project management tool.
However, remember to close the feedback loop and tell the customers what you’re going to do about their feedback.
The added benefit is that by listening to your customer needs, you also get to…
If a customer loves using your product, there is a good chance they might need something adjacent to it. Perhaps you could offer an add-on to your product that another department in your customer’s business could use?
There are plenty of examples of SaaS companies with such an offer in their growth strategy. Mailchimp offers email marketing software, but you can also purchase a transactional email platform and a website builder as paid add-ons to the main product.
This way, Mailchimp users can build pages where they collect customers’ verified email addresses, manage and segment them in the email marketing software and send out transactional emails to those addresses.
They started out with a strong core product, and moved into add-ons that provide a full suite of tools for managing a marketing and sales funnel. Are there better tools for transactional emails and building web pages? Absolutely, but none of those tools are connected so well to Mailchimp.
By offering these additional features, Mailchimp assures more expansion revenue and probably a lower customer acquisition cost (CAC) in general.
Great customer experience can easily lead to more revenue. If a customer is already using one aspect of your product and they seem like a good fit for an upgrade, prompt them to do so.
Slack is an amazing example of this. As soon as you run out of your free messages, you’ll be prompted to upgrade to unlock your search history. And this is not just once but every time you go and communicate with a team member whose messages you can’t see.
The same rules apply to account expansion as they do for free trial upgrades. In the moment that customers see the core value of your product, ask them to pull out their credit card. And there you go, expanded or new MRR added to your account.
Expansion revenue is an amazing boost for the SaaS business model. If you analyze your customer journey and keep a close eye on your customer data, you can earn even more revenue from your existing customer base instead of constantly chasing new customers.
And if you’re looking for a foolproof solution to drive new revenue, decrease your churn rate and improve your overall bottom line, add an analytics dashboard to your product! Don’t know where to get started? Book a demo with our team so we can explain how.
Experience the power of Luzmo. Talk to our product experts for a guided demo or get your hands dirty with a free 10-day trial.
