If your company doesn’t have an expansion revenue strategy, you need to get one. And fast!
Expansion revenue is a critical component to Net Retention Revenue (also known as NRR or NDR). We’ve discussed how NRR is the key metric for healthy SaaS business growth. Turns out, expansion revenue is the real key to healthy growth. 🔑 📈
You can calculate expansion revenue in a month by summing the total new MRR that comes from upsells and cross-sells.
Wait, you don’t have a natural upsell or cross-sell path in your company? Ruh roh!
Solving this issue will be job one. Let me explain why.
First, focusing on—aka maximizing—expansion revenue makes economic sense.
The 2017 KBCM SaaS Survey shows the cost of acquiring a new customer versus the cost to upsell or expand (cross-sell) an existing customer.
Essentially, for every $1.15 you spend to acquire a new customer, you’ll earn $1. On average.
However, for every $0.57 you spend to upsell an existing customer, you’ll earn $1. AND…it only costs $0.30 to earn $1 for expansions. Again, on average.
So, you do the math.
Second, expansion revenue is the biggest determinant of NRR.
Well, assuming your churn rate falls somewhere in the realm of average…
I recently created an NRR model to play with the different factors. This helped to illustrate the importance of expansion revenue.
For instance, even a 2% monthly churn rate can be counterbalanced by just a 1% monthly expansion rate. Even though a 2% monthly churn rate is equal to a horrifying 21.5% yearly churn rate, a modest 1% expansion rate can bring NRR back to almost 100%. Crazy.
And to further prove the point, check out what happens if you flip those numbers…With a 1% monthly churn rate (11.4% yearly churn rate) and a 2% monthly expansion rate, your NRR would be an enviable 120%!
One key observation from playing around with the NRR model is just how early expansion revenue is beneficial.
Specifically, at ~$3M in ARR, you need to start executing an expansion strategy, or you’re leaving money on the table.
But don’t take my word for it. Open up the NRR model and see how it works.
You can see that $3M ARR is a cutoff where the amount of revenue you make from expansion revenue (no new logos) outpaces the revenue you make from only new logos (no expansion revenue). Again, assuming you’re keeping churn at or below 1% monthly and achieving 2% monthly expansion revenue.
But these hypotheticals have limitations beyond simply helping to understand the concepts. What really matters is how these numbers work in your business.
So, input numbers that are realistic to your business. Play around with the model. I think you’ll very quickly understand the power of expansion revenue.
Once you’re convinced that you need to prioritize an expansion revenue strategy, let’s talk. Tingono makes it very easy to implement this strategy!