Expansion Revenue

What is Expansion Revenue?

Expansion revenue is the revenue a current customer generates in excess of their original subscription or contracted purchase price. Businesses typically earn expansion revenue through additional purchases or services, such as upgrades and add-ons.

There are two types of expansion revenue:

• Expansion MRR — The additional amount customers spend on upgraded monthly subscriptions and add-ons, calculated on a month-to-month basis.
• Expansion ARR — Recurring revenue growth created by customers who purchase additional products or services, calculated on a yearly or YoY basis.

When contextualizing expansion revenue, businesses use monthly recurring revenue if they’re trying to understand short-term growth and trends (e.g., the performance of a given product, pricing plan, or customer success strategy). They use annual recurring revenue when they need a better understanding of the long-term impact of expansion revenue on the business.

Synonyms

• Expansion ARR
• Expansion MRR

Importance of Growing Expansion Revenue

Earning more revenue from customers who already subscribe to a product or service is one of the most effective ways for businesses to increase their profits.

Expansion revenue is a good sign because:

• Customers who pay for additional features are essentially reinvesting in the product, demonstrating their commitment to it.
• Those willing to spend more on the product or use it more extensively across their business are clearly satisfied with it. If most of them fall into the company’s ideal customer profile (ICP), the company knows they’ve achieved product-market fit.
• Data indicating a particular customer segment’s preference for certain features and product categories can help sales teams increase their average deal size by suggesting these options upfront.
• To investors, net revenue retention (NRR) of over 120% indicates a healthy, growing company with a product-market fit. Since it’s a retention metric based on only the current customer base, the only way to grow it is to increase expansion revenue.

Expansion revenue can help companies reach their growth goals with minimal effort, because they don’t have to find new customers and convince them to buy their products — they just need to make existing customers happy, and growth happens naturally.

Acquiring a new customer can cost up to 7x as much as retaining an existing one. Expansion revenue improves customer lifetime value while simultaneously making every customer more profitable.

How to Calculate Expansion Revenue for SaaS Businesses

Although many types of businesses (particularly subscription/recurring revenue businesses) measure expansion revenue, it stands out as a SaaS metric.

As a SaaS company grows from startup to IPO or M&A, its ability to generate additional revenue from its customers through wider usage reflects product satisfaction and underscores the scalability of its revenue model.

The formula for expansion revenue is as follows:

Expansion Revenue = [Total Revenue (Start of Month) – Total Revenue (Start of Month)] / Total Revenue (Start of Month)

To demonstrate expansion revenue in practice, let’s use a hypothetical SaaS company, CloudTech.

At the beginning of Q1, CloudTech had an MRR of $100,000. By the end of Q1, through a mix of upsells, cross-sells, and increased usage, its MRR grows to $130,000.

Expansion Revenue = ($130,000 – $100,000) / $100,000

Expansion Revenue = 30%

It’s important to note that expansion revenue doesn’t necessarily account for revenue churn. Churn can significantly impact the significance of expansion revenue calculations, so many businesses use net revenue retention to measure overall business health. They use expansion revenue to understand and improve their customer success strategies.

Ways to Increase Expansion Revenue (with Examples)

Just like there are infinite ways to sell, there are countless strategies to expand within your current customer base. Companies shoot for negative churn (where expansion revenue is greater than losses from downgrades and customer churn).

The following strategies have proven successful in increasing expansion revenue:

Customer Segmentation

Certain types of customers will find more value in complementary products than others. If you want to increase expansion revenue, segmenting your customer base and understanding their interests can be incredibly helpful.

From a customer success perspective, creating different buyer personas based on known preferences can help reps identify upsell opportunities and target their current customers proactively. Since they know how the customer might use the product (other similar customers already have), they can create a targeted offer that speaks to their pain points.

Segmentation also helps teams understand which customers are more likely to upgrade, as well as those that require additional support and education. In addition to increasing expansion revenue, this improves the efficiency with which CS teams grow these accounts.

Personalize Offers

Roughly two-thirds of B2B customers expect an equal or greater level of personalization in their professional lives as they do in their personal ones. With personalization, a higher-priced offer will actually make sense to the customer, because it solves their problem more efficiently.

It’s also worth noting that, personalization is closely tied to customer retention. Without personalized experiences, customers are a lot likelier to leave.

In the B2B space, your customers are also growing their own businesses. Over time, this means increasing headcount, selling into more markets, and investing in new business units. All of these things involve expanding their product usage.

So, by doing nothing other than retaining customers through personalization, you may still increase expansion revenue (even without a specific strategy for doing so).

Upselling and Tiered Pricing

Upselling is the most common strategy for increasing expansion revenue. SaaS companies can upsell their existing customers in numerous ways:

• Slack creatively uses in-app messaging to upsell its freemium users when they reach their product limits.
• Dropbox reminds customers of its premium features in order to upgrade their subscription plans.
• Zapier sends out contextual upgrade messages whenever users reach their account limits.

Basically, the best way to get customers to upgrade is to target freemium or basic plan users. Track product usage and highlight your product’s limitations in-app and via email.

This is done in conjunction with tiered pricing — removing “extra” features to serve smaller customers and adding advanced ones for large customers with complex needs.

Cross-Selling

Cross-selling is the other main strategy for increasing expansion revenue. It involves selling complementary products to existing customers to increase their overall value.

Common ways to cross-sell customers include:

• Including all features in the app, but locking them for lower-tier users
• Discounting microservices and add-ons
• Creating industry-specific products alongside the core product
• Bundling products and services together
• Partnering with companies who offer complementary services

Cross-selling gives customers more value, increases their engagement, and helps them understand how to get the most out of your products. It also enables teams to increase expansion revenue without raising the customer acquisition cost.

Premium Upgrades

Every time a customer upgrades their subscription, that’s more revenue for the business. Not every customer will need an upgrade. But your customer success team will increase expansion revenue by approaching those who could benefit from one.

Premium upgrades can come in various forms:

• Introducing additional features for higher tiers
• Offering discounts to frequent or long-term customers
• Sending personalized offers with free trials and discounted upgrade prices

Premium upgrades are great for increasing engagement, retention, and loyalty. Not only do they drive more revenue per customer, but increase the lifetime value of

Bundles

Product bundling is a common way to offer customers multiple products at once and increase expansion revenue. It’s a form of cross-selling that involves grouping two or more related products into a bundle, discounted (compared to their standalone prices) to make them attractive.

The idea behind product bundles is you increase your average deal size while still remaining profitable. Although your margin might be lower than it would be selling them separately, you’re sacrificing that for the opportunity to sell both products to someone who would otherwise only consider one.

Bundles are particularly effective if you have multiple complementary products that address different customer needs. Rather than selling each product separately, you can offer them together as a package deal — increasing the chance of closing the sale.

Renewals

You might not realize it, but paying attention to contract renewals can really help your retention rate. And, if some of those customers have changing needs they think your product can’t solve anymore, there’s your opportunity to upgrade them (when they would otherwise have looked elsewhere).

When it comes to renewals, you need to think long-term. Start by educating customers early about your products and services, and how they can be used in different ways. Then, continue providing value through various channels (like webinars and emails) throughout the lifetime of the customer.

Most businesses set up automated email flows in CRM. That way, a customer automatically receives some sort of reminder or promotion a month or so their renewal date. Customer Success should also reach out to customers directly with personalized messages and offers.

Adjust Pricing for Existing Customers

You don’t want to offer too many of your customers different rates. That could potentially devalue your product and frustrate users who paud a higher price.

But differential pricing is an excellent way to reward long-term customers and increase customer loyalty. It’s also effective when you’re trying to launch a new product/feature and want to test it in a small, reliable market (a.k.a., your current customers) before rolling it out more widely.

Another way differential pricing could potentially improve expansion revenue is by getting new users in the door who otherwise would be unable to access your product (usually because of budgetary restrictions). A student discount, for example, could land you a customer (and some revenue) in the meantime. A few years later when they need your product for their career, they’ll already be familiarized with it and will gladly pay a higher price. That’s expansion revenue.

You can also adjust pricing based on customer usage, and later offer sliding scale discounts to customers who have increased their consumption. Sometimes, this encourages customers to use the product more frequently and increases product stickiness. Furthermore, if you offer a discount for renewals or upgrades, then this will help encourage loyalty and reduce customer churn.

Product and Feature Development

Of course, the best way to sell more to your customers is to give them what they need. That means ongoing product and feature development.

There are tons of ways to gather customer data for product improvements:

• Solicit feedback through surveys and interviews
• Scrape review sites and monitor for new ones using a social listening tool
• Use a customer data platform to track customer engagement across your product
• A/B test new features with focus groups to see how customers respond

By understanding what your customer needs, you can create new features and products that meet those demands. That, in turn, increases the chances of customers renewing or upgrading their current plans, meaning expansion revenue growth for the company.

How Subscription Management Solutions Help Grow Expansion Revenue

Subscription management software allows businesses to automate subscription-related tasks, like billing and renewals. Some of these tools also offer extra features for managing customer relationships.

These include:

• Automated customer segmentation and personalized communications
• Upsell and cross-sell recommendations based on customer behavior and segmentation data
• Discount codes, free trial offers, and automated renewal prompts
• Product bundling capabilities for creating promotional packages
• System integration for automated marketing and customer relationship management
• Customer portal integration to allow customers to upgrade themselves if they want to
• Automated billing to support subscription changes and reflect them immediately

Essentially, subscription management makes it easier to grow expansion revenue. By making the process smoother and more efficient, you can focus on acquiring new customers while still retaining existing ones. Furthermore, the data-driven insights provided by these tools allow you to better understand customer needs and create tailored offers that.

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