How Do You Increase Expansion Revenue Quickly?
This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.
Originally published: June 26, 2019
Increases in your average revenue per user can stem from many places. You can raise your price, get higher end customers, or coax more upgrades from your current customer base. Regardless of where expansion revenue comes from, it’s absolutely crucial to your success, especially in the world of subscriptions, because you want a healthy amount of expansion revenue to offset any churn that may creep into your business.
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First up, we should understand what’s good expansion revenue from a benchmark perspective. The most efficient companies, when looking at lifetime value (LTV) to customer acquisition cost (CAC) ratios, are fueling that efficiency mainly off expansion revenue.
Note that companies who have an LTV to CAC between three and five are seeing a median of just under 20% expansion revenue as a proportion of their total revenue. Those with an LTV to CAC above five are pushing above 30% in terms of expansion revenue.
Essentially, more expansion revenue is definitely better, but we want to get into a world where we’re seeing 20% or more of our revenue coming from expansion. A bedrock way to make this happen is to use what’s known as a value metric as the center of your pricing. A value metric is what you charge for – per user, per 100 visits, per thousand videos – it’s a measure for some proxy of value that you’re providing your customer.
The beauty of a value metric is that customers are only paying for what they’re using, so churn tends to be lower with companies using this type of pricing model. Expansion revenue tends to be much higher, as well.
Those companies using a value metric are seeing 30 to 100% higher levels of expansion revenue than their feature based pricing counterparts. Note that this gain occurs for both functional based value metrics, which would be a pricing model like per user, and for outcome based value metric, which would be like per conversion.
A bit more tactically, customer success also has a pretty significant impact on expansion revenue. Those companies utilizing either scalable or dedicated customer success teams are seeing 60 to 120% higher levels of expansion revenue than those who have no customer success indicating that the use of humans communicating value and spurring upgrades can actually greatly impact your bottom line.
While there are certainly very tactical offers and gimmicks you can use to increase your expansion revenue, the truth is that great expansion revenue requires you to put value at the core of your operations. Using a value metric in your pricing is a very specific decision that requires some careful thought. Making sure customer success exists in your business costs time and money. Yet, if you remember that subscriptions are all about relationships, these decisions become easier, because you’ll want to continue to do things that get as close to customer value as possible.
Want to learn more? Check out our recent episode How does contract length impact ARPU and churn? and subscribe to the show to get new episodes.
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You've got the questions,
and we have the data.
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This is the ProfitWell Report.
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Hey, Neil. This is Ed
Lissinski, CEO of ZYT.
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I'd like to know,
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how do you increase
expansion revenue quickly?
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Welcome back, everyone.
Neil here from ProfitWell.
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Increase in your average revenue
per user can stem from many places.
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You can raise your price,
get higher end customers,
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or coax more upgrades from
your current customer base.
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Regardless of where
expansion revenue comes from,
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it's absolutely crucial to
your success, especially
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Yet expansion revenue isn't
the easiest metric to increase.
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So to answer this question,
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we looked at just under
four thousand subscription
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companies, and
here's what we found.
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First up, we should understand
what's good expansion revenue from a
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benchmark perspective.
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The most efficient companies,
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when looking at
ltd to cap ratios,
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are are fueling that efficiency
mainly off of expansion revenue.
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Note that companies who have
an LTV to CAC between three to
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five are seeing a median of
just under twenty percent
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expansion revenue as a proportion
of their total revenue.
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Those with an LTV to CAC above
five are pushing above thirty
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percent in terms of
expansion revenue.
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Essentially, more expansion
revenue is definitely better,
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but we wanna get into a world
where we're seeing twenty
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percent or more of our a
revenue coming from expansion.
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A bedrock way to make this
happen is to use what's known
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as a value metric as a
center of your pricing.
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A value metric is what
you charge for per user,
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per hundred visits,
per thousand videos.
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It's a measure for some proxy
of value that you're providing
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to your customer.
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The beauty of a value metric is
that customers are only paying
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for what they're using,
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so churn tends to be lower with companies
using this type of pricing model.
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Expansion revenue tends
to be much higher as well.
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Those companies using a value
metric are seeing thirty to one
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hundred percent higher levels
of expansion revenue than their
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feature based
pricing counterparts.
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Note that this gain occurs for
both functional based value
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metrics, which would be a
pricing model like per user,
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and for outcome
based value metric,
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which would be like
per conversion.
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A bit more tactically,
hundred and
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twenty percent
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higher levels
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of success teams
are seeing sixty
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to a hundred and twenty percent
higher levels of expansion
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revenue than those who
have no customer success,
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indicating that the use of
humans communicating value and
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spurring upgrades can actually
greatly impact your bottom line.
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While there are certainly very
tactical offers and gimmicks
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you can use to increase
your expansion revenue,
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the truth is that great
expansion revenue requires you
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to put value at the
core of your operations.
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Using a value metric in your
pricing is a very specific
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decision that requires
some careful thought.
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Making sure customer success exists
in your business costs time and money.
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Yet if you remember that subscriptions
are all about relationships,
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then these decisions become
easier because you'll want to
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continue to do things that get as close
to the customer value as possible.
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Well, that's it for now.
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If you have any questions,
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feel free to send me an
email or a video to neil at
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dot com.
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And if you got value today
or on any of our other episodes,
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we appreciate you sharing
on Twitter and LinkedIn because
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that's how we know
to keep going.
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I'll see you next week.
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This week's episode is
brought to you by Asana.
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