Every VC-backed, early-stage SaaS companies have aggressive revenue targets to achieve. The best ones grow ~12% MoM. Guess what? I once grew a business from <$1m to $10m in revenue in 6 quarters. The best companies do $2m to $10m in 5 quarters. When it comes to revenue, the objectives of a SaaS business are to acquire new customers and increase the lifetime value of the customer. In this essay I will cover increasing the lifetime value of the customer through expansion revenue.
It is certainly true that expansion revenue is the turmeric spice of your SaaS business. It is also true that it is easier to sell to an existing customer than it is to sell to a new customer. This is because an existing customer is already familiar with your brand and your unique value proposition in the market. When you have a great product/offering (this includes a great customer success team) or customers who love you, the customers will help you find new ways of uncovering greater opportunity. It is also easier for them to do more with an existing partner, than it is for them to learn about a new offering.
It is in your best interest to design your offering to start with the smallest job to be done and continue to uncover the opportunity to expand the value you can deliver.
One could also make the argument that SaaS businesses by their nature need to increase customer lifetime value. This is a key to long-term success and being capital efficient. Let me tell you more.
What is expansion revenue?
Expansion revenue is simply the additional revenue a business brings in from selling to its existing customer base.
What you sell for this additional revenue can vary. You can sell them an additional set of feature for the existing product or offering (aka an upsell). You can also sell them an entirely new offering that expands on the value you are already delivering (aka a cross-sell).
Where does expansion revenue fit into the overall revenue make up?
SaaS companies breakdown there revenue in three way:
- new revenue (new customer)
- expansion revenue (new revenue from an existing customer)
- churn (lost customer or lost revenue)
Why does expansion revenue matter?
Every VC-backed SaaS business has revenue targets and they all need to manage your cash burn. Expansion revenue is a way to grow your business while being efficient. Simply put, it's easier to sell to an existing customer than it is to sell to a new customer.
For the quants reading you will appreciate this. Expansion revenue supports increasing customer lifetime value (LTV). Given it's easier to sell to existing customers it will also reduce the overall cost to acquire a customer (CAC).
"Efficient companies...are fueling..efficiency mainly off expansion revenue." - Patrick Campbell, ProfitWell 
Let's walk through a new customer onboarding. Marketing will invest resources in attracting and nurturing a lead. If the lead is qualified then the sales team will deploy effort to convert that lead into new business.
For the more product-driven companies, Marketing will still invest resources in attracting and nurturing a lead and you may have a viral/referral component to your growth strategy that drives new leads. Product will invest resources into freemium offering and from there you may have some level of sales support for the more complex sales.
Expansion revenue may be as simple as an email campaign, or having a call to discuss growth for an existing customer. Again, the product may also move the needle on this as well depending on feature tiers.
Upsells and cross-sells are not difficult if you are truly delivering value to the customer through your product/offering. One signal of product-market fit is that your customers are begging for additional jobs to be done. It should be a natural progression that customers either begin to buy more from you as they grow or that they need to add on additional features and benefits to support their growth.
The expansion revenue selling framework
Often times, as a consultant, I interview a client's customers. I will often hear how proactive my client is and that they can add more value to the customer.
I've created an expansion framework to understand how many of the total customers a business has have the potential for expansion revenue. I've found $150K - $1M in expansion revenue opportunities within Phase 1 of my engagement with a client. The expansion framework will define the following:
- account name
- point of contact
- opportunity for expansion
- what offerings can be sold
- how much it's worth
- probability of close
- forecasted value
Look. On the path to growth it's critical that companies check the box on customer success before pursuing scale. Honestly, you can't even hit scale if you aren't retaining customers and revenue. And while you can't expand the existing customer count, you can most certainly expand customer revenue. Here's another way to think about it:
- Determine metrics that could be potentially used to define success. These could inclue, but are not limited to NPS, product setup, product usage, retention.
- Your business will benefit from moving a percentage of the existing customers to the new offering and tracking key metrics to check the box on customer success.
- Separate out Customer Success from the AE role (I see the need for this a lot!) and implement a Customer Success Manager. Assing the retention and customer succcess leading indicator to the CSM.
- Create a weekly cadence of learnings shared with marketing and sales as beta is the process is setup and owned by the CSM once they are installed.
Calculating expansion revenue
Reminder that expansion revenue is the revenue a business earns from selling to its existing customers.
Revenue (new, from existing customer) - Revenue (old, from existing customer)
A brief reminder that new revenue from existing customers can come in the form of upsells, or cross-sells.
Setting a business up for success
Let me show you how to set your business up for success. First, determine the smallest job to be done. Offer it at a free/affordable price point.
As you engage with the market client selection will be critical. If you aren't bringing in the right clients then they won't stick around long enough for you to expand the revenue.
Leverage inbound marketing. The best businesses provide an incredible amount of value in exchange for only an individual's attention. They also have a journey they take the customer on with pricing tiers that increase as the journey progresses.
I encourage you to consider maximizing your the expansion revenue of your business. It will do wonders for your revenue line.
*Note: I found quite a few sources. I didn't use much of the details because many were providing data back to 2016 and those who discussed SaaS didn't clearly state whether it was B2B, B2C, or B2B2C SaaS. That being said, theses were the best posts I found on the topic.
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