Should You Focus Your Recurring Revenue Growth on Expansion Revenue or New Logos?

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What’s the best way to grow your SaaS business’s recurring revenue quickly and consistently?

Pulling in new logos expands your customer base along with your monthly recurring revenue (MRR), while farming your current customers with upsells and cross-sells can do the same to your revenue in a quicker and often less demanding way.

Of course, there’s a limit to how frequently you can farm the same customers.

The answer is, perhaps obviously, you’ll need to do a bit of both to ensure your success. But the questions then become:

  1. how do you balance one against the other, and
  2. how much time, budget, and staff should be committed to each strategy?

Finding the optimal mix for your SaaS business depends on a few things.

  • Your business goals
  • Your cash flow
  • Where you currently stand with acquisition, expansion, and customer satisfaction

These considerations and more all feed into the decision-making around your recurring revenue growth strategy.

To get started, you’ll need to understand how expansion and new logo revenue streams each contribute to an overall recurring revenue growth plan for SaaS business models.

Expansion revenue: an effective and fundamental strategy

While more customers = more revenue, it’s no secret expansion revenue from existing customer relationships is critical to healthy SaaS growth. Recurring revenue comes not from new sign-ups, but rather from customers that stick around instead of churning.

Building more value into your subscription service with upgrades and add-ons ensures your business meets growing customer needs so you can grow alongside them.

Don’t take our word for it.

Patrick Campbell at ProfitWell says 30% of SaaS revenue should be from expansion. Too much energy is put into acquisition, he explains, with 7 of 10 SaaS executives rating net-new growth as their top priority.

“True growth in SaaS doesn’t come from new customers, it comes from existing customers,” Campbell insists.

We’ve talked about using expansion revenue to offset churn before. Some ways SaaS leaders can maximize recurring revenue growth with expansion revenue include:

  • upselling
  • cross-selling
  • add-ons
  • using promotions or discounts to encourage upgrades
  • making upgrading easy
  • adding premium account features customers want
  • enabling business-wide adoption of your product, and
  • rethinking your ideal customer.

Expansion revenue makes less budgetary demands on your SaaS business than acquisition. Marketing, sales, and engineering are also easier when directed at a receptive audience of existing customers. New customers are simply tougher to get than upgrades, making the development of your expansion revenue stream an attractive strategy.

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See expanded recurring revenue at work

Expansion revenue in the SaaS business model is happening all around us.

Everyone from Amazon to Apple uses tactics like offering add-ons or additional services and products at checkout, kicking off expansion even while acquiring new customers.

Dropbox is a SaaS brand well-known for fully leveraging recurring revenue growth. The digital storage provider uses a freemium pricing strategy to acquire customers, suggesting an upgrade to a paid subscription when a user’s free space is used up. If their space fills up again or their needs otherwise expand, Dropbox again suggests an upgrade.

The company’s dominance in the SaaS world is undeniable. Yet, it’s conversion rate is a measly 2.2%. This is what we mean when we say every business’s approach to recurring revenue growth will be different. Two percent may not make a big difference for some SaaS brands, but it’s a revenue model that certainly worked well for Dropbox.

Over at marketing platform Terminus, CEO Tim Kopp increased revenue retention by 30 points in just two quarters.

His secret? Strong customer-facing teams, clear internal processes, and providing products their customers asked for.

Acquisition: a company is nothing without customers

To win at recurring revenue growth, you can’t just focus on expanding existing accounts. Expansion by itself isn’t sustainable because some level of churn is unavoidable.

New, good-fit customers ensure longevity.

Andy Mura at customer support platform Userlane says acquisition boils down to three elements: brand, product, and customer success.

“Some of the largest companies in the market often mention referrals as their main source of leads. That’s because customers identify themselves with their brand identity, realize that they’ve improved their lives by effortlessly implementing and using the company’s product, and know that such companies will always support and help them achieve their goals,” he said.

To play like the big brands, SaaS leaders need:

  • a dedicated acquisition strategy separate from—but complimentary to—their expansion strategy
  • good-fit leads that are more likely to stick around and upgrade, feeding into your MRR expansion strategy, and
  • high customer-satisfaction so customers recommend your product to their peers, generating more acquisition.

Achieving this requires dedicated effort.

Rather than splitting your team’s attention between these two different-yet-related goals, try allocating resources in a way that lets team members focus on specific acquisition tasks.

Smart acquisition secures recurring revenue

A SaaS business that certainly has bragging rights in acquisition is Canva. The platform acquired over 15 million users in less than seven years. Two million signed up in just the first two years.

Canva accomplished this by:

  • tapping into demand for design products that were easier to use than existing platforms
  • prioritizing ease-of-use and a frictionless experience for customers
  • building a strong SEO website with a targeted product page, and
  • offering affordable plans within their target audience’s budget.

Now valued at $15 billion, it’s hard to argue with Canva’s strategy.

Over at SaaStr, Jason Lemkin reports on the rapid growth of Five9, a cloud call center platform recently acquired by Zoom for about $15 billion. Five 9’s growth is thanks to taking on more enterprise customers and new logos, but also by increasing customer retention and upsells.

Clearly, acquisition and expansion revenue go hand-in-hand when it comes to recurring revenue growth.

Take action on acquisition and expansion to grow recurring revenue

According to McKinsey, SaaS businesses with 20% growth still have a 92% chance of disappearing in a few years. Even 60% growth only secures a 50/50 chance of survival.

An effective recurring revenue model requires a two-pronged approach that includes both expansion and new logos.

Customer Imperative suggests reviewing the following areas of your SaaS business to optimize growth.

  • Pricing model
  • Product strategy
  • Customer engagement model
  • Customer feedback
  • Customer usage patterns

Most of these areas focus on existing customers and their user experience. Some, such as the pricing model and product strategy, play important roles in acquisition.

The final verdict when it comes to splitting the acquisition vs. expansion effort may come to this.

  • New logo acquisition will need a bigger budget, with heavy focus on finding and nurturing good-fit leads through targeted marketing. Marketing and sales will work hardest here.
  • Expansion revenue will demand more ongoing and dynamic work. Listening and responding to customer feedback and requests is critical to creating add-on features customers want, reworking plans, or otherwise creating additional value to increase revenue. For this reason, customer support and product development play crucial roles.

Finding the right balance for your SaaS business will take careful consideration. While expansion revenue has the potential to combat churn, you can’t expand without a viable customer base.

Reflect on your SaaS business model and business metrics to determine how to best allocate your time, energy, and resources into each strategy.

Tags: SaaS Recurring Revenue

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