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 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.
Expansion revenue helping fuel growth
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.
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.
If you want us to dig further into this data or any other data, ship me an email or video to firstname.lastname@example.org. Let's also thank Fred for sparking this research by clicking here to share on LinkedIn.
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