Why current customers are the key to growth
To anyone who understands how SaaS really works, this chart should come as no surprise:
As companies improve, more of their revenue comes through the expansion of current customers. The naive view of this will be that the observation is obvious: companies that are larger have more customers to expand. Correlation does not equal causation.
But the previous year's Pacific Crest Survey, which showed the same results, broke down the companies in each GAAP band by growth velocity. This makes it easier to see the impact of expansion revenue on growth:
Companies that are growing faster get more of their new annual contract value (ACV) from upsells. Slower growth comes from acquiring entirely new customers.
Constantly acquiring new customers is a massive drain on your time and resources. The easiest way to see this is through the cost of acquiring revenue through each of three channels: new customers, expansion customers, and retained customers.
Acquiring a completely new customer is over four times more expensive that upselling an existing customer. For every $1 of revenue you get from a new customer, it costs $1.13 to acquire. That means it takes over a year for you to recoup your customer acquisition costs for a new customer. It's only halfway through the first quarter of their second year that you see profit from these customers.
Upsell customers cost just $0.27 for every $1 yearly revenue they bring. So you get back their costs after a single quarter. This difference of ~1 year in payback period can make a huge difference when you take into consideration the compounding nature of subscription SaaS.
For a company growing through new acquisitions only every month, the payback period for ten new $100 customers each month is over 2 years. At its lowest point, this company is losing $7k per month through customer acquisition. The cumulative sum of all negative revenue is $123,000.
But this isn't the problematic part. It's that all this time spent in the red hampers growth. With such high customer acquisition costs (CAC), instead of compounding positive revenues, the compounding negative revenues mean that this company would be way behind in growth. After 36 months, this company is in the black, but only at $15k MRR.
Contrast that with a company growing only through expansion revenue. With all the same numbers, but a much lower CAC, the payback trough is hardly visible—they are profitable at the 6-month mark. After 36 months, their monthly recurring revenue (MRR) is 3X the acquisition—at $45,000.
OK, so you aren't going to build a company entirely through expansion. For a start, you need to acquire to expand. But these ideal examples show the truth. The more your business model is skewed towards expansion, the more money you are going to make. You make money from your existing customers.