Growing your SaaS startup company isn’t just about getting more customers for your main products. You would also want to find new sources of revenue for the company. Here, those very same customers provide the answer.
This is where expansion revenue comes into play. But how does it work exactly? And how can you get more out of it? Let’s explore this venture and discover what Virtua Solutions can do for you.
Uncovering Expansion Revenue
In its simplest definition, expansion revenue refers to the additional revenue you generate from existing customers outside their initial purchases or contracts. There are two primary drivers of expansion revenue for SaaS.
- Upselling: This is pushing and upgrading existing customers to a higher product or account tier.
- Cross-selling: Offering additional features or services which help users get more out of your main product.
Besides these forms of expansion revenue, you can also explore other options. Here, what differentiates expansion revenue from other revenue streams is that it always ties back to your main product. The goal is to boost the company’s overall revenue and the earnings from your main product.
Why Expansion Revenue Matters
Okay, so the main reason that you want expansion revenue is because it gives you more returns. However, there are still other benefits you can gain from it. These benefits play a crucial role in the growth of your company.
One importance of expansion revenue is that it drives later-stage growth. As your startup company matures, you will notice a diminishing return from your existing markets. That is because you have already exhausted all possible sources of customers
At this point, you will need to look inward. Here, your existing customers become your largest source of income. As such, you will need to look for ways not only to retain them, but also to get more out of them.
Offsetting Churn
Churn is one of the main enemies of any SaaS startup company. Every customer that leaves by the end of the month means a loss of revenue. But there are other ways to combat this than trying to attract new customers.
Generating expansion revenue is one such strategy. Here, your goal is to create what’s known as negative churn. This is where the revenue generated from your existing customers exceeds that of the revenue you lost from leaving customers. At this point, the business becomes more sustainable even with your present customer base.
Picturing Customer Loyalty
Expansion revenue isn’t just about generating more profits. You can also use it to gauge customer loyalty. The idea is simple: more spending from each customer shows greater loyalty toward your brand. Effectively utilizing this idea can help you devise better engagement strategies for these customers.
Calculating The Expansion Revenue Of Your Startup Company
Getting your overall expansion revenue requires you to first get your monthly recurring revenues from the various expansion revenue streams. You do this as follows
MRR=Average monthly revenue per user x Total number of users.
Note that you should ensure that the average monthly user spending is indeed only from your expansion revenue streams. For that, you should have your revenue data segmented clearly.
Once you have calculated your expansion MRR, the next thing you need to determine is the expansion rate. Here, you use the following formula.
Expansion rate=(Expansion MRR for current month-Expansion MRR for the previous month)/Expansion MRR from the previous month.
As you can see, the expansion rate is a cumulative metric. You will need to track it over several months to see what changes are happening. A faster increase in the rate indicates that your revenue is growing significantly.
How Much Should Your Expansion Revenue Be?
This is a significant question for a SaaS startup company because it helps you better plan your customer acquisition and retention strategies. According to experts, expansion revenue should comprise at least 20% of your overall revenue. That can go up to 40% at its most for larger companies. \
Note that the ideal expansion revenue can vary between businesses. It will depend on different factors. For instance, your current revenue versus the costs of doing business. By determining the correct expansion revenue value, you can chart business growth towards a more achievable direction.
How Your SaaS Startup Company Can Increase Expansion Revenue
Generating and growing the expansion revenue of your startup company is a rather involved effort. It isn’t just about doing upsells and cross-sells. Be strategic in doing these to capture the interest of your regular customers and get them to purchase more.
Monetizing The Core Value Of Your Product
As we said earlier, the effectiveness of expansion revenue generation ties heavily to how it connects back to your main product. People will buy your upsells and cross-sell if they can use these to get more out of your main product.
To achieve that, understand what your customers want to get out exactly from the product. It can vary from customer to customer. For instance, one might use your SaaS service to augment their operations. On the other hand, another user might rely on your software for intermittent needs.
With these varied uses, you need to create matching offers. One thing you have to consider here is the price point you will set for a particular offer. You need to align that price point with the intended use. A customer using a lower-tier version of your product might not readily advance to a higher-tier one if the price is way too high for the value they expect to get. Thus, you might want to consider intermediary price points that let them go up without spending too much.
Selling Value
Choosing the right expansion product is the first part of improving your expansion revenue strategy. The second part is promoting these expansion products to them. Here, emphasize the value more than the product. Focus on how to showcase that value.
For that, you need to go back to your customers’ commentary. Find the specific issues they want to resolve and present the expansion product as a potential solution. Note that you need to approach each customer differently to help them understand what they gain better.
You should also go beyond that and present whatever future value you can offer. For that, you need to communicate with users constantly. Proactively ask them any problem they think they might encounter. From there, you can develop new expansion products accordingly.
Helping Your SaaS Startup Company Expand Its Earnings
We understand that generating expansion revenue will require a lot of effort. And we are ready to lend you the help you need. That goes from marketing these expansion products to helping customers as they use these. Contact us today and let’s get started expanding your earnings.