Expansion Revenue is Your Lifeblood
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 Some information may be out of date.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: March 28th, 2018
Expansion revenue is the lifeblood of a successful subscription business, particularly when it comes to looking at growth.
On this episode of the ProfitWell Report, Fred Stevens-Smith, CEO and Co-founder of Rainforest QA asks us to dive into the data around expansion revenue. To answer Fred's question, let’s look at the data from over 5,000 companies and 300,000 subscription consumers.
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The Fuel for Efficient Companies
The most efficient companies when looking at LTV to 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.
Growth Cohort Compared to Expansion Revenue
Efficiency doesn’t tell the whole story though. Growth is important, and if you’re efficient you’re not always investing in growth. Interestingly enough though, companies growing in the Top 40% of their cohorts are seeing at least roughly 20% of their revenue coming from expansion and a high end of nearly 40% expansion revenue.
How much more?
We’ve seen a good crop of externalities for companies who have cracked the 30% threshold when it comes to expansion revenue. ARPU tends to be growing at 2x the rate as those companies with expansion below that threshold. Revenue retention is typically net negative, and even gross churn is typically half.
Of course, this data is highly correlative, because to get proper expansion revenue at these levels, you need good pricing, good product, and ultimately to be using a value metric. Yet, 20 to 30 percent can act as a solid north star to benchmark your efforts going forward. That being said, the answer is probably still more, more, and more.
Want to learn more? Check out our recent episode: How Great Support Impacts Retention 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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Each week we dive deep on benchmarks of the subscription economy that you just can't get anywhere else
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This is the ProfitWell Report
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Yo, Patrick, it's Fred. As I sit here on my morning walk
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The top of Bernal Heights I find myself wondering what portion of my revenue
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should be up sell and expansion revenue?
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You're my kind of man Fred thinking of the subscription economy amongst nature, but to answer your question
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Let's look at the data from over 5,000 companies and 300,000 subscription consumers
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As to not bury the lede the answer is just straight up more more more MORE
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Expansion revenue is the lifeblood of a successful subscription business
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particularly when it comes to looking at growth.
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The most efficient companies were looking at an LTV 2 CAC ratio are actually fueling that efficiency mainly off of expansion revenue
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note that companies who have an LTV - CAC between 3 & 5 are seeing a median of just under 20 percent expansion revenue as
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a proportion of their total revenue
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those with an LTV - CAC above 5 are actually seeing 30 percent or more of their revenue coming from expansion that being said
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Efficiency doesn't tell the whole story
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Growth is important
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And if you're efficient you're not always investing in growth
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interestingly enough though companies growing in the top 40 percent of their cohorts are seeing at least
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roughly 20% of their revenue coming from expansion and a high-end of nearly 40 percent coming from expansion
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So to be blunt, more more and more is really an answer of at least 20%
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And you really should be shooting for closer to 30%
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We've seen a good crop of
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externalities for companies who have cracked this 30 percent threshold
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When it comes to expansion revenue ARPU tends to be growing at 2x the rate as those companies with expansion below that threshold
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Revenue retention is typically net-negative and even gross churn is typically half. Of course this data
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is highly correlative because to get proper expansion revenue with these levels you need good pricing good products and
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Ultimately you need to be using a value metric yet 20 to 30 percent can act as a solid North Star to benchmark your efforts
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That being said the answer is probably still more, more, and more.
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Well, that's all for now if you have a question ship me an email or video to PC@ProfitWell.com and let's also thank
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Fred for sparking this research by clicking on the link below to share on LinkedIn to give him a nice little shout-out
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We'll see you next week
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This episode of the ProfitWell Report is brought to you by
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Pricing Page Teardown where Patrick and Peter break down the pricing pages and strategies of
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Subscription companies from all corners of the market. Sign up right now to be notified as soon as a new episode is live
