No matter what industry your business is in, expansion revenue should be something you put time into tracking and improving. After all, expanding upon the customers you already have is five times more cost effective on average than bringing in a new customer.
Expansion revenue is generated by expanding into the customers that you already have at your company through upsells and cross-sells. If you are unfamiliar with expansion revenue or why it’s important, you should first check out our post on what expansion revenue is and why you should be tracking it.
While expansion revenue has to be tracked individually, analyzing it alongside other growth metrics will give you a full picture of how the growth at your company looks.
How Does Expansion Revenue Affect Other Metrics?
As your solution and company as a whole mature, you will be able to dive deeper into where the revenue you are generating is coming from as well as what you can do to support its growth.
“Every company starts growing their business through acquisition, but eventually they will need to shift their focus. That doesn’t mean that acquisition stops, but it does mean they’ll need to figure out how to scale through revenue retention and expansion,” says Guido Bartolacci, Head of Demand Generation at New Breed.
As a company, you don’t want to count on all of your revenue to come from bringing in new customers because that’s not a scalable or sustainable business model. Instead, you want to have a balance coming from acquisition, retention and expansion.
While expansion revenue is an important metric for your business, looking at that metric alone won’t give you the full picture. When analyzing that data, you need to have a wide-lens view of all related metrics to make the right business decisions.
For example, Net MRR Churn is a metric that is useful when analyzing your company's growth and revenue generation. Net MRR Churn is the difference between MRR lost from downgrades and MRR added from expansion revenue.
If you are calculating your Net MRR Churn and have a positive number, that doesn’t mean you aren’t churning away customers. If you’re significantly upselling and cross-selling to the customers you are retaining, you can churn numerous customers and still end up with a positive net MRR. Expansion revenue is a piece of your net MRR churn; it can be high enough to make it seem like you have nowhere to improve. But, looking deeper at those numbers will actually show you that you could be working to reduce the number of customers you are churning all together and increase the revenue of your business even more.
Looking at the big picture and relationships between different metrics will help you gauge the real health of your business as well as find opportunities for improvement.
Another metric to consider when analyzing expansion revenue is the payback period.
Payback period is how long it takes to recoup the cost of acquisition for a customer. In other words, it’s how long you need to keep a customer to make a profit from them. The goal of any company should be to have the smallest cost of acquisition and the shortest payback period because this will result in faster and higher revenue generation.
Payback period is directly related to expansion revenue because if you are expanding upon customers through cross-sells and upsells, you can ultimately shorten the payback period for that customer.
“If a customer costs $1,200 to acquire and you get $100 from them in MRR, then it will take a year for a business to recoup that cost, assuming they never downgrade or upgrade,” says Guido. “But you can reduce that payback period if you can expand into them”
Customer lifetime value (CLV) is another metric that is influenced by expansion revenue. CLV is a prediction of the net profit you will receive from a customer.
For example, if you are running a subscription-based model at your company and a customer signs up for a year at $30 a month their lifetime value is $360. But, if you can expand into that customer and they upgrade to a $50-a-month subscription, their lifetime value is now $600.
Expansion revenue should be an important part of your growth strategy for your business. Once you are accurately monitoring and evaluating your expansion revenue and the metrics that go along with it, you will need to begin focusing on improving those rates.
Improving expansion revenue comes down to customer experience. Your customers need to be receiving the best experience possible from your product or service, as well as everyone at your company at all times.
If your customers aren’t good fits to begin with or don’t feel passionate about your brand and offering, they are going to churn and definitely aren’t going to increase their spending with your company.