In every startup journey, there comes a time where priorities shift from scaling to sustainability. Expansion revenue plays a key role in this shift as a startup matures.
Expansion revenue is the new revenue generated from your existing customer base. They come in the forms of upsells, cross-sells, and add-ons.
As your startup settles into the late stage, you’ve probably started to experience the diminishing returns of the growth stage. You’ve just spent all your time and resources trying to scale by tapping into all the available markets and ideal audiences. Hopefully, you were successful in acquiring as many new customers as possible. However, without any more markets to sell your product to, your company and its revenue can become a bit rocky. This is where expansion revenue comes in to keep the company afloat.
During these later stages, your focus will be on maintaining your customer base and extracting upsells, cross-sells, and add-ons from them. Expansion revenue should make up a high portion of your new revenue stream in order to be sustainable in the long run. As a result, you won’t have to spend as much time and resources trying to acquire new customers. Your company will be able to sustain itself from the existing customer base.
Not to mention, expansion revenue is much more profitable. The growth stage is a time where most of your funds go toward sales and marketing campaigns and if your customer acquisition cost is higher than average, profitability is almost always out of the question for startups. Acquiring new customers is much more expensive and difficult compared to selling to your existing customer base. First, acquiring new customers tends to be 5 times costlier. Second, selling to your existing customer base is much easier since they already understand the value of your product. With expansion revenue being much more cost-effective, mature startups tend to start seeing more positive returns in their business models.
Ideally, you should be expanding your revenue throughout all the stages of your startup’s journey, but the late stages are where you really want to prioritize expansion revenue and profitability over hyper-growth.
Customer retention is key in order for expansion revenue to lead to profitability. Not only do you need to have an existing customer base, you also need to maintain it. When a customer churns, you are losing both their recurring revenue and their potential expansion revenue that would have helped create profits. The best way to reduce churn and retain customers is through your customer success team.
Creating a positive customer experience from the moment a lead becomes a client is the best way to reduce churn and increase retention. Have your customer success team focus on creating an effective onboarding process—a large portion of customers tend to churn if they do not see value in your service from the get-go. Maintaining this effective relationship into the rest of the customer’s journey with your product is also crucial. Not only do you want happy customers during the onboarding process, but also during their lifespan with the service.
Lastly, your customer success team is the actual team that will sell upsells, cross-sells, and add-ons onto the existing customer base. If the team maintains their relationships with the customers and has a good understanding of the customer’s needs and wants with the product, expansion revenue should be relatively easy to achieve.
A great way to measure the effectiveness of your expansion revenue efforts is through the net revenue retention metric.
Formula: Net Revenue Retention = (Recurring revenue at the beginning of the period + expansion revenue - churned revenue) / (Recurring revenue at the beginning of the period)
Your goal is to aim for a net revenue retention above 100% and maintain it. Anything below that, you’ll want to take another look at your strategies and see where you can improve. Anything above 100% is strong as the most efficient companies will get around 130% net revenue retention.