What is expansion revenue?
Expansion revenue is the additional revenue you get from a customer after their initial purchase. Working on your expansion revenue strategy allows you to generate extra income from existing customers rather than finding new ones.
What are the pros of expansion revenue?
You don’t have to pay for new customer acquisition costs when you generate additional revenue from existing customers.
It costs five times more to acquire a new customer than to retain an existing one. You can capitalize on this by finding ways to increase the value of existing customers. By building your expansion revenue, you can reduce your churn rate and consistently grow your MRR.
Upselling or cross-selling to customers who already know and trust you can be an efficient way to grow your business. Overlooking the potential income from existing customers can be a huge oversight. Only 18% of companies focus their resources on retention, while most spend their time and money looking for new opportunities.
Expanding on the existing revenue channels can make your business more profitable in the long run. Expansion revenue can hugely benefit your CTV (customer lifetime value) and help accelerate your growth.
Related: Everything you need to know about Average Revenue Per User (ARPU) and Annual Contract Value (ACV).
What drives expansion revenue?
The key drivers of expansion revenue are:
- Upselling or upgrading price plans
Upgrading a customer’s existing plan or selling them additional features are typical ways to boost your expansion revenue, for example from a free trial to a premium plan or between other paid plans.
If you understand how your customer uses and interacts with your product, you can offer them higher pricing tiers or the option to add more users over time.
Experimenting with different pricing options can help you establish what drives your customers to upgrade organically.
Offering a product that provides value to your customers’ lives and exceptional service is the best way to retain and potentially upsell to them.
- Developing new or personalized product features
Another way to assess expansion opportunities is to work closely with existing customers to understand which features provide the most value to them. You could build personalized, customizable features for existing customers using this feedback. If your product grows alongside your most important customers’ needs, they will be less likely to churn.
Listening to customer feedback from your existing clients is also a great way to get ideas for new product features. If you hear the same feedback from numerous clients, build the features they need most, then upsell them to existing clients.
If you launch new features, make it as easy as possible for customers to understand how to use them and how they will benefit them. Making it as simple as possible will make it a no-brainer to upgrade their plan.
Cross-selling products or services to existing customers is another common way to build expansion revenue. If you try to sell them every product in your catalog, they could get tired of constant sales pitches. Making the cross-sell offers relevant to individual customers will increase their chances of opting in.
- Reactivation of dormant subscriptions
You don’t need to find new clients to generate more revenue. Take a look at existing customers who canceled subscriptions or downgraded. Try to work out why they did this, and have a conversation to encourage reactivation. Offer them a discount or offer to reactivate their subscription.
How do you calculate expansion revenue?
You can determine your expansion revenue by adding your new MRR from existing clients. This is the money they’ve spent with you after their initial purchase.
You shouldn’t include revenue from new clients when assessing your expansion revenue.
For example, a customer with a $90 a month plan upgrades to a $120 plan. The expansion revenue for that customer is $30. If they’re on a yearly subscription, that customer’s annual expansion revenue is $360.
While expansion revenue is a good way to boost your monthly bottom line, you can’t rely solely on your existing customers for growth. It’s all about striking a balance between finding new clients with a high LTV and expanding revenue from existing clients.