2018 B2B Land & Expand Survey Part 1: Expansion Matters
https://www.rekener.com/resources/metrics/how-to-calculate-dollar-based-renewal-rateBased on findings from a survey of more than 300 senior B2B Finance and Operations professionals, as well as our expertise in sales and BizOps, we explore the importance of defining expansion not as a monolithic category of revenue, but as 4 distinct types: upsell, cross-sell, price and users, and measure expansion's massive impact on B2B revenue.
This post offers the full text of Part 1 of our report in HTML format; you can get the PDF of Part 1, along with a new Expansion Revenue Worksheet, by clicking here. We'll add links to Part 2 in mid Feb.
With the rise of the Software as a Service (SaaS) business model over the past 15 years, companies have a greater awareness of the importance of growing annual recurring revenue (ARR) by not only landing new customers but also selling more to existing customers. Expansion matters for two big reasons:
Expansion revenue must increase as a percentage of total revenue in order to grow the average revenue per account (ARPA).
The customer acquisition cost (CAC) of expansion revenue is significantly less than the CAC associated with net new revenue.
Yet despite this broader awareness of the value of expansion revenue, the state of understanding in B2B sales and marketing about the different types of expansion revenue and the best practices for how to allocate resources to achieve results is remarkably immature. There are two big reasons for this:
While the definitions of net new and renewal are generally well understood in the industry, the definitions of the different types of expansion revenue are not standardized. As a result, different businesses use the terms expansion, cross-sell and upsell in very different ways and sometimes interchangeably.
The responsibility for net new generally falls to the sales team and the responsibility for renewal increasingly falls to the customer success team, but there’s no standard best practice for managing expansion revenues. The responsibility for expansion may fall to sales, account management, customer success, product or even finance teams.
With a lack of clarity about definitions, roles and responsibilities, it’s likely that expansion strategies for many businesses are incomplete, resulting in expansion revenue opportunities falling through the cracks.
Rekener is focused on helping B2B recurring revenue companies develop and execute growth strategies using data gathered from throughout the account lifecycle, so we decided to dig into this important subject.
We’ve combined our own experience in B2B business operations, or BizOps, along with survey data from over 300 B2B operations and finance leaders to gain a better understanding of (a) how expansion revenue of different types contributes to growth and (b) how companies can best allocate resources related to expansion to drive that growth.
We started by reviewing the well-regarded 2017 KBCM Technology Group Private SaaS Company Survey, which makes both of the above points very clear:
Regarding expansion revenue as a percentage of total revenue, they note, “The median respondent gets 19% of new ARR sales from upsells and expansions; larger companies rely more heavily (up to 2x more) on upsells and expansions.” Note that KBCM defines upsell as “selling additional products/modules/functionality to an existing customer” and expansion is defined as “expanding sales of existing products to existing customers.”
Regarding CAC, they found, “The median cost to acquire $1 of new upsell ARR ($0.57) is 50% of the cost to acquire $1 of ARR from a new customer. The cost to acquire $1 of new expansion ARR ($.30) is 26%...”
After conducting our own survey of more than 300 leaders in finance and BizOps roles in recurring revenue B2B businesses, we’re capturing our findings in two parts:
In Part 1
We examine the 4 different types of expansion revenue and assess the relative magnitude of each type by company size in terms of revenue and growth rate. We see how tracking expansion revenue by type brings a greater understanding about where expansion revenue comes from.
In Part 2
We take a deep dive into how B2B businesses divide responsibility for the different types of expansion revenue. We explore how roles and responsibilities are evolving in order to maximize expansion revenue, and touch on the topic of how compensation can be used to motivate the team to achieve the desired results.
Part 1: Expansion Matters
Recurring Revenue Defined
Understanding how to expand accounts in order to grow revenue is a question that applies to both SaaS and non-SaaS businesses. Account expansion has been an important part of selling since the early 20th century when the division of sales into teams of “hunters” and “farmers” was first employed in the insurance industry, and is a critical element in recurring revenue growth. We define a Recurring Revenue business as any company that sells products or services more than once to a customer over the lifetime of the business relationship with that customer. Throughout this report, we use Initial Capital Letters for terms we define.
For perpetual license models and hardware sales, expansion requires follow-on sales over time. In this report, we divide survey participants into those from companies with subscription business models, including both cloud-based and downloadable (Subscription business model), and non-subscription business models, including perpetual software licenses and hardware sales (Perpetual business model). By including both Subscription and Perpetual business models in the survey, we gain a clearer picture of the similarities and differences in best practices between the two models.
For both Subscription and Perpetual businesses, the goal of account expansion is to grow revenues more efficiently. For this to be true, the cost of acquiring expansion revenue must be less than the cost of acquiring net new revenue. Over the last 10 years, metrics and equations for assessing the efficiency of a SaaS business have been established. The best known metrics are lifetime value (LTV) and CAC, which were developed by Philippe Botteri and David Skok. While these are incredibly useful, remember that they are only estimates. And like all estimates, they become more reliable as the amount of data increases over time. Tomas Tunguz later pointed out the flaw in relying on LTV/CAC metrics for start-up companies that don’t yet have a lot of operating history.
For Subscription and Perpetual model companies, the best way to understand the value of account expansion is to calculate the net present value (NPV) of cash flows from product sales and compare that to the NPV of cash required to acquire, maintain and grow that customer over time. With enough years of operation, NPV can be calculated based on financial results and, with these calculations in hand, it can be well understood. However, most growth companies don’t yet have enough history to reliably calculate NPV of cash flows, so our best alternative is to use estimates of LTV/CAC, where we extrapolate the average lifetime of a customer by looking at historical churn rates, or number of purchases over a particular period of time.
In Winning in the BizOps Era, Part 3, I pointed out the pitfall of relying on a single LTV/CAC ratio to describe an entire business. Instead, when using LTV and CAC metrics, companies should use customer data to zoom in on accounts and segments in order to see whether some are better than others in terms of expansion and LTV growth. My colleague Greg Keshian explained the power of this approach in a blog post on LTV-based segmentation. While these calculations reveal patterns in revenue growth, they’re simply a snapshot in time. We recommend that companies continually work to understand the details of how accounts grow over time in their business. Close, rigorous and continual examination of account expansion dynamics provides powerful insight into future revenue opportunity and helps identify the best practices that engage, serve and retain customers over time.
Definitions of Product and Expansion
The problem with the definitions of upsell and expansion in the KBCM 2017 SaaS Survey is they don’t address the nuances of the different types of expansion revenue. Specifically, the definition of upsell in the KBCM 2017 SaaS Survey lumps together the sale of “additional products/modules/functionality” to existing customers, even though the dynamics of the sale of additional products can be very different from the sale of additional modules or the sale of increased functionality of existing products. Accordingly, in our survey and reports, we created alternative definitions. As expected, the results show that the differences are significant and material. Throughout this report, we use Initial Capital Letters for terms we define.
Expansion is a Category, Not a Type
We define Expansion as an overall term that includes any revenue that is not from Net New Sales or Renewals. Within our definition of Expansion, there are four types of revenue that need to be understood separately. Not only are the skills required to sell each type of Expansion revenue very different, but also the rewards for achieving results must reflect these different skills. In many companies, the words “expansion,” “upsell” and “cross-sell” are used interchangeably. This is a big mistake because it can hold us back from properly organizing the team and creating the right incentives to achieve goals. In short, it pays to be precise and consistent.
Product, Net New, & Renewal
Before describing the four types of Expansion, let’s first define the term Product.
A Product is a set of features accessible via the same or similar user interface with the same primary Product name even if a subset of the features may be available at different prices.
For example, a vendor of B2B billing software that offers both a small business version and an enterprise version of the same billing package is selling one Product. Different versions of the Product tend to share the same overall value proposition.
A Net New Sale of a Product is the first time that the Product is sold to a customer.
A Renewal is defined differently for Subscription and Perpetual models:
In the Subscription model, a Renewal is defined as the renewal of the annual subscription price for the Product.
In the Perpetual model, a Renewal is defined as the renewal of the annual maintenance and support contract for the Product.
The 4 Types of Expansion Revenue
With the definitions of Product, Net New Sales and Renewals understood, we define the four types of Expansion revenue — any revenue that is not derived from Net New Sales or Renewals — as follows:
- Upsell is defined as revenue from selling more expensive versions, upgrades or other add-ons to existing customers for their existing Product.
- Cross-sell is defined as revenue from selling additional Products or services to existing customers resulting in an additional sale.
- Price is defined as any increases, reductions and discounts that have an impact on the average revenue per account. Price is a very powerful lever to pull to increase the return on sales and marketing investments, though it’s often left out of the conversation when it comes to account Expansion.
- Increasing Users is defined as revenue from an addition to the number of users, seats or licenses for any given Product for customers who have already purchased that Product. The level of effort to sell this kind of Expansion is typically lower than the level of effort required to upsell more expensive versions, upgrades or other add-ons. Increasingly, adding additional users can be managed independently by the customer online, without any interaction with the vendor or salesperson. Consider the user licensing model in G Suite, for example.
For businesses that sell more than one Product, all four Expansion revenue types apply. For businesses that sell only one Product, the Cross-sell Expansion revenue type does not apply.
Why Cross-sell Deserves Special Attention
Cross-selling creates an entirely new set of challenges for sales and marketing teams. While businesses build or acquire additional Products with the goal of expanding their revenue per account based on the belief that it will be easier and more cost-effective to cross-sell than to acquire more net new customers, many find that approach doesn’t work out as planned.
The reason is simple: the buyer of the first Product is often different than the buyer of the new Product. For example, a maker of marketing automation software develops an integrated sales CRM module. The buyer of the first Product is a marketing director, while the buyer of the sales CRM is a sales operations director. Though the Products are integrated and the combination makes each purchase more valuable, the Products are nonetheless sold to two individuals.
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When the buyer persona and related value proposition are different, the vendor must create additional targeted sales collateral, training and marketing campaigns. There still may be some efficiency benefits to having multiple products that can be sold to the same account, but the cost of multiple go-to-market efforts will result in lower overall efficiency when compared to cross-selling to the same persona in the same account.
Attach Rate is the most powerful metric for assessing the degree to which the sales team is able to cross-sell one or more Products to existing customers. Attach Rate is the measure of the percentage of customers of Product A who also purchase Product B. The higher the Attach Rate, the greater the efficiency of go-to-market efforts. Prioritizing cross-selling efforts based on Attach Rates is critical to forecasting the mix of net new and cross-sell revenue, as described by Greg Keshian in “6 Cross-sell Metrics Every B2B Sales Leaders Should Track.”
2018 B2B Land & Expand Survey Results
The survey participants consisted of 327 individuals from the software or information technology industry who reported a majority of their revenue coming from B2B sales. The survey was limited to participants working in the United States (77%), United Kingdom (12%) and Canada (11%), summarized in Figures 1-5.
Findings: The Impact of Expansion Revenue is Massive
The most significant finding from the survey was the magnitude of revenue that comes from Expansion. Remember that Expansion is defined as any revenue that is not from Net New sales or Renewals. Averaged across all respondents, Net New and Renewals make up 48% of revenue, and Expansion (of all types) represents 52%, the largest share of the revenue story for B2B software and information technology businesses. As shown in Figure 6, Expansion revenue was distributed across all types, with Upsell and Cross-sell contributing 15% and 14%, respectively, and Users and Price representing 12% and 11%, respectively.
By comparison, the 2017 KBCM SaaS Survey shows, using their own definitions of upsell and expansion, that expansion contributed an increasing percentage of revenue as companies get larger; however, 333 out of 366 of their survey’s participants (90%) had less than $50 million of ARR. The results of our survey suggest that the impact of Expansion is even more powerful when we look at companies across a broader revenue range. Even when we exclude Expansion due to Price, the average contribution from Upsell, Cross-sell and Users exceeds 40%. See below for a further exploration of the results by company revenue size and growth rate.
Findings: Expansion’s Impact by Business Model
The importance of Expansion is similar for both Subscription models as well as Perpetual models, as shown in Figure 7. We see that Net New, Renewal and Expansion revenue as a percent of total revenue are nearly identical.
When we drill down into the different types of Expansion revenue by business model in Figure 8, we see Expansion revenue is similar for both Perpetual and Subscription business models, so it’s reasonable to regard the two as a single group of respondents.
Findings: Expansion’s Impact by Company Size and Growth Rate
When we look at results by company size as measured by revenue, we see a clear difference between companies with less than $100 million in revenue (N = 163) and companies with revenues greater than $100 million (N = 164). As shown in Figure 9, the revenue contribution of Net New is similar for both groups, but the over $100 million group shows Expansion as a significantly larger portion of revenue. Businesses with less than $100 million ARR had a higher percentage of revenue coming from Renewal and a lower percentage from Expansion when compared with the over $100 million group.
When we drill down into the different Expansion types by revenue size in Figure 10, the larger companies had similar Net New and Upsell percentages, but larger companies saw bigger contributions to revenue from Cross-sell, Price and Users.
To assess the impact of Expansion on growth rates, we compared lower growth rate companies (less than 25% annual growth, N = 183) to higher growth rate companies (greater than 25% annual growth, N = 144). Growth rate is driven by new revenue in the form of either Net New business or Expansion business. As shown in Figure 11, Net New is similar for lower growth rate and higher growth rate businesses, but Expansion is a bigger revenue contributor for higher growth rate companies. Figure 12 shows that all four Expansion types deliver a greater percentage of revenue for higher growth rate businesses.
When we compare the set of respondents from companies that are both larger than $100 million in annual revenues and greater than 25% in annual growth rate (N = 93) to the companies that are both smaller than $100 million in revenue with less than 25% in annual growth rate (N = 112), we see that the contribution of Expansion is even more significant. As shown in Figure 13, Net New is similar in both groups, but Expansion is much larger for the larger, higher growth rate companies. In Figure 14, we see that all four Expansion types are bigger for the larger, higher growth rate companies.
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Takeaways & Preview of Part 2
Expansion is Not Just for SaaS-y Companies
Growing recurring revenue via account Expansion applies to a bigger universe of companies than just SaaS businesses. For both Subscription and Perpetual business models, Expansion revenue represents the majority of annual revenue (52%) reported by those who participated in our 2018 B2B Land & Expand survey, with participants from Perpetual businesses reporting 53% and those from Subscription businesses reporting 51%.
Clearly, Expansion revenue is very important for both business models. Our conclusion is that anything we can learn from the survey data about Expansion statistics is valuable for companies with both types of business models.
Bigger, Higher Growth Rate Companies Have More Expansion Revenue
We compared companies by annual revenue size, annual growth rates and by combinations of revenue size and growth rate. To go deeper than what was reported in the KBCM 2017 SaaS Survey, we recruited Finance and Operations people given their solid grasp of the numbers, and looked for representation from both smaller and larger companies. In the KBCM 2017 SaaS Survey, 90% of participants reported less than $50 million in annual revenue. In our survey, 249 out of 327 participants (76%) reported greater than $50 million in annual revenue. Findings from both surveys are consistent in that they both show upsell and expansion increase (using KBCM’s definitions) as a percentage of revenue as companies grow. Our survey, with a much higher number of participants from companies with revenue above $50 million, demonstrates clearly that Expansion (using our definition) is the largest contributor to revenue for bigger, higher growth rate companies.
Though our findings don’t prove that investing in Expansion efforts will make your company grow bigger faster (causation), we can conclude that Expansion revenue will be a much larger part of the revenue mix when you get there (correlation). It suggests future value would be found by preparing for that outcome, which means developing a solid Expansion strategy that encompasses account-based marketing, selling, customer success/account management staff and support functions, all supported by data, systems and appropriate compensation plans.
Expansion Type Matters
Cross-selling multiple Products requires a very different sales approach than upselling new modules or functionality of an existing Product to existing customers due to different user and buyer personae and decision-making. Upselling new modules and/or functionality is also different in terms of sales approach compared to increasing revenue by adding Users. Further, the survey data shows that increasing average revenue per account by increasing prices or decreasing discounting is an important Expansion type, yet this factor is often left out of the conversation about Expansion.
As a result, we proposed a set of definitions for four different Expansion types and then tested the importance of these types as part of the survey. What we learned is (a) all four types of Expansion are material contributors for all respondents on average and (b) all four types are bigger for larger and higher growth companies.
By drilling into the 4 types of Expansion revenue and seeing the impact each type has on revenue of companies of different sizes and growth rates, it’s clear that businesses would benefit by a deeper and more granular understanding of the impact of Expansion on their own revenue.
How Do We Make It Happen?
Because Expansion clearly matters when building a business with a strong growth rate, then the next question is how do we make it happen? The first thing is to use historical customer data to spot patterns that guide our Expansion strategy for each of the 4 types of Expansion: Upsell, Cross-sell, Price and Users.
In the case of Cross-sell, for example, this initial analysis should comprise a number of metrics, including these 6 Must-Know Metrics that were outlined by my colleague Greg Keshian:
Sales Effort by Product
Activities per Opportunity
Win Rate by Revenue Type
(Net New and Expansion)
Attach Rate by Product
Once we have a strategy, then we must organize our go-to-market program and team to drive all 4 types of Expansion revenue and use incentive compensation to motivate the team to achieve the desired goals.
Data provides the foundation for our Expansion efforts. Instrumented properly, companies that measure Expansion by Upsell, Price, Cross-sell and Users, at both an account and Product level, have more intelligence in hand to inform decision-making. As with any important initiative, a sound strategy is based on a data-driven hypotheses. If we don’t break out non-Net New and non-Renewal revenue into these 4 Expansion types, we may miss an opportunity to capture and grow meaningful revenue.
In Part 2, we’ll share some of our own experience with creating Expansion strategies along with more survey results on how B2B businesses organize and compensate their team in order to make it happen. Stay tuned.
- Download Part 1 in PDF format along with Expansion Revenue Worksheet
- Join the Strategic BizOps Community for biweekly updates from the world of BizOps
- Connect with other BizOps and Sales leaders IRL at the next Strategic BizOps meetup
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Alex is CEO and Founder of Rekener. Previously, he served as President and COO at ZeroTurnaround and as President of the Delta Division of BBN Technologies. At ZeroTurnaround, he grew high velocity inside sales by 6x in 3 years. At BBN, Alex co-founded RAMP and AVOKE, both recurring SaaS businesses based on BBN's world class speech recognition and natural language processing tech. Alex started his entrepreneurial career as founder and COO of NBX Corporation, which led the transformation of business telephone systems to Voice over IP. Alex’s companies have generated $500M in liquidity events and more than $1B in sales.
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