Imagine if your SaaS company could tap a source of new sales that required less work and expense than acquiring new logos, and had the potential to increase revenue by 20-30%? That's the exact opportunity presented by expansion revenue. Unfortunately, a typical SaaS company is not doing enough to maximize this income stream.
So, what exactly is expansion revenue? It's revenue over initial purchase, generated by selling to your existing customer base through upselling, cross-selling, and renewals. As a benchmark, a company should strive to have 30% of its total revenue coming from expansion revenue, yet most SaaS companies average just 10%.
It's 60%-70% easier for a business to sell to its existing customers, so every SaaS company should prioritize expansion revenue. So, what's the best way to get started?
What Department Should "Own" Expansion Revenue?
Renewals and account expansion sales are important to the health of your SaaS business. Put those deals in the hands of the people with the best chance to close them: your sales team. However, no one knows a customer better than their CSM, which means no one is more qualified than a CSM to frame upsells around the value a customer will get from it. The CSM should be supporting the AE, making sure they have all the insight needed to present the deal in a way that shows value to this specific customer. Then, the customer will never feel like they’re speaking to two different organizations.
Where Sales and Marketing have a transactional relationship with clients, Customer Success Managers have the opportunity to engage customers on a deeper level; this provides them with a candid look into a client's goals and thought processes. They can also glean valuable insights that guide everything from new product development to marketing strategies. On the customer's end, they have a trusted advocate, and even a friend, who they can interact with to help them succeed with purchased products or services.
Keep the Customer Success Relationship Pure
It might seem logical for a Customer Success Manager to leverage their close relationship with clients to capture expansion revenue; however, topics such as price negations risk changing the dynamic of the CSM-customer relationship. A customer might start wondering whether their CSM is gathering info just to sell them something. Or worse, an awkward turn in the relationship could lead to customer churn.
The Customer Success Manager's job is to build trust, find out what a customer wants to achieve, and assist them with that journey. It's best to keep the CS role focused on this crucial work.
On the other hand, the Sales team's role is oriented towards what's best for the SaaS company. Their skill in getting customers to convert on offers makes them most suited to own your ER strategy. To capture expansion revenue, they will capitalize on the groundwork laid by the Customer Success team. Customers clearly understand their role, so a customer's "friendship" with your company will not be placed in jeopardy when Sales solicits them with an offer.
What Are the Three Components of Expansion Revenue?
Expansion revenue is like a secret weapon helping a SaaS company reach its revenue targets quickly and efficiently. Existing customers are already familiar with your brand and products; if you've been savvy with how you've managed Customer Success, they will be eager to go deeper into your offer stack.
Expansion revenue is supported by the following pillars of sales activity:
- Upselling: refers to selling additional benefits and features to a customer on top of a product or service they've already purchased. Examples could be things like extra storage space, one-on-one support time, or additional admin seats for team members.
- Cross-selling: refers to selling complementary, standalone products or services suitable for the same customer's needs. Examples might be a related software package or affiliate products or services from a partner brand.
- Renewals: refers to customers who re-commit to purchasing a subscription service. With SaaS, this typically means paying for access to cloud-based software over a fixed, recurring period. Because renewals are the lower hanging fruit of most SaaS companies' revenue stream, it can be tempting to rely too heavily on this pillar of ER. Strive to explore upselling and cross-selling opportunities to stay competitive.
The Takeaway: Lean Into Expansion Revenue Today
Expansion revenue needs to be an essential part of any SaaS company's growth strategy. If Customer Success has been prioritized in your business, you'll likely find that the outcomes you achieve from your strategy outpace that of your competitors. While your company's Sales team will be the owners of your ER process, their work will be supported by the relationships cultivated by your Customer Success department.
Request a demo of Vitally's best-in-class Customer Success platform today to see how we're putting key customer insights into the hands of leading SaaS Customer Success and Sales teams, empowering them to successfully expand within an account, and, in-turn, grow their business.