Subscription business models aren't a new thing. Since the 1600s, newspapers and book publishers have used it to drive recurring revenue.
Fast forward to the 21st century, and the rise of technology and SaaS products has led many companies to move away from the traditional once-off purchase towards the more sustainable subscription model.
The reason for its success?
Subscription-based models rely on your relationship with clients. If you have happy customers, you're guaranteed recurring monthly revenue.
But the real prize? Expansion revenue.
The success rate of selling to your existing user base is 60-70%, while a new prospect is as low as 5-20%.
Your customers already know, like, and trust you.
But before we jump into how you can increase your expansion revenue, let's take it back to the basics and unpack what it means for your SaaS business.
What is expansion revenue?
Expansion revenue are earnings that happen after the customer's initial purchase. The impact of expansion revenue on your business means you're earning more recurring revenue and reducing your customer acquisition costs.
The higher your revenue from upsells and cross-sells, the more profitable your SaaS business will become in the long term.
Let's look at an example.
A user self-serves into your Tier 1 plan for $14 per month. If the user doesn't churn, you can expect $168 in annual contract value (ACV).
Not too bad.
The user starts inviting team members to use your SaaS product two months into the subscription. However, the account quickly reaches its max number of seats before everyone can join.
The user self-serves and expands to a Tier 2 plan for $50 per month and subscribes to an add-on service for $20 per month.
Your business is now making $672 in additional revenue thanks to the main drivers of expansion revenue: cross-sells and upsells.
Expansion MRR shows if a company can deliver more value to customers and monetize it. Generating expansion MRR is extremely valuable, especially in the long term. Most of the top SaaS companies grow from their existing customers.
Christoph Janz, Co-founder & Managing Partner, Point Nine Capital
How to calculate expansion revenue
Calculate your expansion revenue with the following formula:
(Average Revenue Per Customer) x (Number of Existing Customers) x (Expansion Rate) x (Monthly Recurrence) = Expansion Revenue
So, if you have 1500 customers, you have an ARPC of $150, and 15% of your customers are purchasing additional products, which generate revenue an average of twice per month, you'd have $67,500 of expansion revenue.
How to increase your expansion revenue
Are you struggling to sell the additional value you can bring to your users?
Here are six customer expansion strategies to generate more sales from your existing loyal customer base, whether you're getting zero upsells or only a few cross-sells.
Map out your customer journey
You've probably heard the phrase "map out your user journey" at least 100 times. Maybe you're rolling your eyes because it's such basic SaaS business advice.
But here's the thing.
It's said on repeat because it works.
Think of it this way.
Without working to understand the natural progression a user will take, you're missing a quintessential ingredient to your start-up's success. It's like trying to bake a cake without using any flour.
You'll miss vital upsell and cross-sell opportunities that have a much higher probability of closing than with a new prospect.
How much higher?
According to Investp, you're 60-70% more likely to sell to an existing user, while a lead has a close rate of 5% to 20%.
Create different product tiers
Once you understand the trajectory of your user base, you can use the data to formulate better product tiers and price points that match your customer's needs.
Let's dive into an example from Asana, a project management app.
Asana offers users three different product tiers:
The Basic tier is Asana's freemium product. It's a PLG motion to attract new users to the platform and is for individuals or teams getting started with project management.
It helps you manage tasks and personal to-dos and includes features like:
- Collaborate with up to 15 teammates
- Unlimited tasks, projects, messages, and file storage
- Assignee and due dates
- 100+ free integrations
The Premium tier is for teams who need more functionality to track and manage their projects. It's one of the ways Asana expands free accounts into paying customers.
By introducing a slew of additional features, you can only use on a paid plan like:
- Workflow builder
- Unlimited dashboards and free guests
- Custom fields
- Milestones, forms, rules, and task templates
Cost: $13.49 per user per month
The Business tier is a larger plan for Enterprise accounts or teams that manage more complicated projects at scale.
It includes everything on the Basic and Premium plans and attracts larger accounts with advanced features like:
- Workload, portfolios, and goals
- Custom rules builder
- Advanced reporting and integrations
- Approvals, proofing, and form customization
Cost: $30.49 per user per month
Asana's product tier and price points work well for the following reasons:
- Customer personas: The platform understands the needs of the three different types of customers it attracts.
- Feature gating: Using specific features, Asana creates a natural expand motion that grows with an account's business through its different upgrade options.
- Low risk, high value: The barrier for entry is low, but there is enough value to keep users around and create product stickiness.
How can you apply Asana's growth strategy to your business?
- Create product tiers to appeal to specific types of customers and match the customer journey.
- Test different price points and PLG motions.
- Add new features to tiers over time to drive cross-sells and revenue growth.
Sell add-ons or additional products
Want a low-effort way to monetize your existing user base and add more value to their product experience?
Sell add-on products to your customers.
It gives you an additional revenue stream, product stickiness and reduces customer churn.
How can you integrate add-ons into your SaaS business?
Take a page from Hello Bonsai's book, a freelancing management app. It offers a slew of features under client, project, and financial management to help you run your online business.
Besides its base product, which includes three pricing tiers (Starter, Professional, and Business), Hello Bonsai offers two separate add-ons:
- A tax assistant for $10 per month
- Partners access for $9 per month
These two adjacent products appeal to freelancers at different entrepreneurial journeys.
If it's your first year freelancing, tax season feels overwhelming. You must figure out what counts as a write-off, track your expenses, and file all your documentation for tax season.
The tax assistant alleviates this pain by doing the heavy lifting for you. It tracks your expenses, automatically identifies tax write-offs, and estimates your quarterly taxes.
But the feature only works for U.S. taxpayers, making it an unsuitable complementary product for Hello Bonsai's international user base.
The partner add-on is for seasoned freelancers or business owners who need help with company management and need to give other users full access to the account.
Hello Bonsai is excellent at identifying pain points, building a feature to solve them, and strategically monetizing the solution.
The app could easily put these two features under the Professional or Business plans, but it would only add value to a small group of users.
It makes more sense to monetize the features as add-ons and use them to drive expansion revenue.
Develop new features based on product feedback and your vision
Collecting product feedback is more challenging than it seems.
Yes, you can ask your existing userbase, "what do you want?" but you're not going to get the answer you need to build a better product.
People want to be liked.
When you ask someone what they want, it's possible you'll receive an answer based on three things:
- What they think you want to hear.
- How they like to think of themselves.
- The limit of their imagination.
"The trouble with market research is that people don't think how they feel, they don't say what they think, and they don't do what they say" — David Ogilvy.
So what's the solution?
You need a balance between your customer feedback and your vision.
For example, Hello Bonsai has a feature request list for users. Anyone can open a ticket, and other users can upvote it.
For the product development team, it's a fantastic research tool and can help prioritize rollouts. However, that doesn't mean the top-ranking requests are automatically made into features.
Sometimes the best solution for your user base is something they didn't know they needed yet. If you rely solely on market research, you limit the scope of your brand. You limit how much you can surprise and delight your users.
Innovation is nuanced. It's a delicate balance of listening to and ignoring your users.
By combining your customer research and product analytics with your vision, their lifestyle, desires, and needs, you can create future features that increase product stickiness and make your users feel seen and heard.
What is the result for your business?
New feature rollouts encourage current customers to upgrade their plans, increasing your expansion revenue, and making your product more desirable to new potential customers.
Use email marketing to educate users and create FOMO
FOMO (aka the fear of missing out) is a powerful approach to marketing your SaaS product.
Well, 60% of people purchase because of FOMO marketing.
If you're not using it to drive expansion revenue, you're leaving money on the table.
What makes it work so well?
It comes down to basic human psychology. Our minds want to take advantage of an amazing opportunity. You can harness FOMO for your SaaS product by reminding users about the features they're missing out on.
For example, if a user signs up for your freemium plan, create an email marketing campaign highlighting your product's capabilities on your paid tier and the biggest benefits to encourage product upgrades.
Or you can use customer segmentation based on engagement. Send your biggest fans a drip campaign explaining how to get more value out of your product by upgrading or using an advanced add-on feature.
Help customer success identify opportunities for expansion
Expansion revenue doesn't only happen from users self-serving to a higher pricing tier. The top SaaS companies have customer success and sales teams who use tools like Breyta to identify adoption patterns and the best accounts to land and expand.
With our one-click integration, you can create high-level and granular customer journey maps. Track whether users are achieving crucial milestones and taking actions that indicate there is room for an upsell or cross-sell and warning insights for at-risk customers.
That's not all.
Breyta lets you track interactions with features not included in a customer's subscription.
What does that mean?
If you let users see all your features (including those unavailable), you can set up tracking events to see if someone is browsing them. Once the trigger goes off, your customer success team will get a notification, signaling the account is warming up for an expansion.
Prefer a more DIY approach?
To manually surface accounts, ask yourself the following questions:
- Is the account close to maxing out its usage?
- Is the account not using a key feature that would help users achieve their business goals?
- Is the account close to running out of seats?
Whatever approach you choose, the key is using your product usage and customer data to proactively reach out and drive expansion revenue.
Expansion Revenue Improves Your SaaS Metrics
Increasing your expansion revenue goes beyond seeing numbers go up on a spreadsheet. The real business benefit is its long-term significance on your company's performance and health.
When you can increase your recurring revenue while keeping customer acquisition costs down, you improve other SaaS metrics like:
- Customer lifetime value (LTV): The higher a user's subscription payments, the higher the customer's lifetime value.
- Customer acquisition costs (CAC): As a user's LTV increases, it takes a shorter time for the customer to pay back their customer acquisition costs.
- Net monthly recurring revenue (MRR) churn: When you grow your expansion revenue, you decrease your net MRR churn and push your SaaS company towards a net negative churn rate.
The effect of expansion revenue on your business is powerful. It helps your company grow faster and become more profitable without relying solely on new customers to get you there.