Discover how to build and implement a solid expansion strategy for your SaaS business. Explore the different ways to increase your expansion revenue and deliver results.
Successful SaaS businesses implement growth strategies across customer acquisition, retention, and expansion. This is to say, they learn how to:
- Acquire more of the right customers
- Retain them for longer
- And expand their accounts or broaden the pool of customers they can serve.
This guide is all about part three of that journey, expansion.
Once your SaaS business has got customer acquisition and retention nailed down - the number of new customers is heading up, and they’re staying with you as a loyal set of subscribers - you’re going to want to target expansion.
So, in this guide, we take you through everything you need to build and implement a successful (and compliant) expansion strategy, including:
- Different ways a SaaS business can expand
- How to put an expansion plan into action (and the pitfalls to avoid)
- How to measure success with metrics that matter
What do we mean by expansion?
Expansion is the final stage of a successful SaaS growth strategy. It’s all about getting more money from those customers you have, and broadening your offer so you have a larger target market to go after.
Expansion is important because it becomes harder to grow by relying on your current acquisition strategy and retention tactics alone. Customers that are easy to convert will have been scooped up, and those left will be harder (and so more costly) to acquire. All the while churn, which even the best retention strategies can never bring down to zero, will be eating away at your base.
Three ways a SaaS business can expand
Increase revenue from existing accounts
Expansion should be easier, and certainly less expensive, by getting more revenue from your existing customer base, than going after new ones. SaaS businesses have a number of ways they can go about this.
The most obvious is to increase prices. Young SaaS businesses can often be under-selling their service, having started at a low price (or even free) to attract their first customers. Years later they could be leaving money on the table. Profitwell suggests reviewing prices at least every quarter and making changes every six to nine months.
Of course, it’s easier to ask customers for more money if they’re going to get something in return. So you can also consider introducing layered or tiered pricing. Higher price points can be justified by giving customers access to enhanced features, more users, more capacity, or bespoke terms. A gradual scale, where value for money increases with each step, will entice customers to spend more.
Case study: Expensify
Initially, Expensify was completely free for all users. Then they started to charge, but only the recipient of the expense report - typically the company’s finance department. This kept Expensify free for 90% of users.
Next, they introduced activity-based pricing, tied to the number of people who submit in the previous month. This way there is no cost for “inactive” seats. They set the price at $5 per submitter, with the first two submissions free. This gave them traction in an account. Three years later, Expensify was working with much larger customers but hadn't updated its pricing. To combat this, they introduced new monthly subscription packages, a prepay option, and an enterprise plan for companies with over 1,000 employees that need a custom contract.
Adapt for new customer segments
SaaS businesses that are reaching market saturation or struggling to fight off new competition will need to broaden their offer to new audiences. This doesn’t mean reinventing products. Instead, it’s about adapting what’s worked to make it more relevant to certain groups.
This may involve targeting a different demographic with more relevant product features, a nuanced UX, tailored content, or even launching a new strand to your business model.
Case study: Urban Sports Club
When the Covid pandemic hit, Urban Sports Club suddenly found itself without the facilities to host its fitness classes. They used this as an opportunity to not only pivot their business model online but also broaden their appeal to new audiences by producing content and hosting classes on mental wellbeing, meditation, remote working, and dealing with change. The success of this organic content allowed them to discontinue paid marketing initiatives.
If you’ve been targeting the enterprise market, you could turn your attention to volume selling with smaller accounts. Introducing a discounted (or freemium) entry-level package is an established expansion tactic. Or you could go the other way, and move upmarket.
Case study: Framer
Framer began as an interactive design tool for individuals. As inbound requests from enterprise companies started rolling in, they saw the opportunity to move from a device-based license model to a seat-based billing. They implemented invoices and local wire transfers for all annual contracts, and prorated invoices for adding and removing seats. They built out their inside sales team to ease the upsell from individual subscriptions to enterprise licenses. And they put measures in place to comply with local sales tax thresholds. Their list of enterprise customers today includes Netflix, Tinder, and MailChimp.
Expand to new geographies
Another way to expand is to look abroad for new customers. In theory, a SaaS business is global by definition. But availability means little if you can’t persuade customers in different countries to become paying customers.
To do this effectively, SaaS businesses can employ a number of tactics. Communicating in the local language is a start, from marketing campaigns right through to the product UX. Also by being empathetic to cultural nuances and differing business priorities, practices, and pricing expectations.
Payment preference matters too, and this varies wildly around the world. Today there are a myriad of ways to pay, from bank-to-bank transfers to the global card networks; local schemes to digital wallets; and now emerging methods such as ‘Buy Now Pay Later’ and even crypto. Let customers pay how they want, and they’re more inclined to buy from you. The reverse is also true; for example, 60% of ecommerce consumers will abandon their cart if they cannot pay with their preferred payment method.
Doubling down on other local benefits can include transacting through domestic banks, creating country customer support teams, and enhancing latency and data security by partnering with the right choice of cloud infrastructure partner.
Case study: Rock Content
Founded in Brazil in 2013, Rock Content now has offices in Mexico, the USA, and Canada. CEO Diego Gomes explains: “We started local: we wanted to win Brazil. Phase 1 was all about building a brand and winning our domestic market. Phase 2 was to become a regional leader. It started with some of our customers in Brazil asking for content in Spanish. We also had a small volume of leads coming in from Mexico and Colombia. We then started experimenting with Spanish-language demand generation. This led to us hiring our first Mexican sales rep, and then our CRO moved to Mexico to open our office there – our first office outside of Brazil.”
Listen to their story.
How to implement your expansion strategy (and the pitfalls to avoid)
That’s the theory done. Now it’s time for the hard work to start. Expansion plans can be complex to implement, and many SaaS businesses have been caught out by not thinking things through. Here we look at how to get things right from the get-go.
Research, research, and more research
Whether your expansion plan is built on increasing prices, going after new targets, or pivoting your business model, do nothing until you’ve done your research. The more you do, the more chance of doing things right. Companies that invest in marketing research on average grow 2–3 times faster than those that don’t.
Optimum price points should be calculated, key influencers and decision-makers mapped, the competitor landscape understood, acquisition channels analyzed, sales cycles designed, and staffing and resources costed, to name just a few.
Here, choice is the name of the game. Test multiple expansion plans, across different customer segments and acquisition channels, to work out the most profitable. If the numbers don’t stack up, go to the next opportunity.
Case study: Kissmetrics
Behavioral analysis platform Kissmetrics saw a 300% increase in email subscriptions by repositioning themselves as thought leaders. They segmented different audience personas and served each relevant content based on their online reading history. They added in the offer of a content gift and a free trial of their tool in exchange for an email address. Each time they gained a subscriber, they handed over authoritative guides, full of valuable insights written by industry experts.
Not all markets are alike
Doing business abroad comes with extra challenges. We’ve already touched on the importance of understanding payment preference in every country. That’s only half the story. Being able to switch on local currencies and payment methods at a moment’s notice is what really makes the difference — 43% of retailers say they’ve been unable to benefit from surging demand in some markets because they could not offer the most effective payment method. More on how to avoid that in the next section.
Selling into more markets also means more regulations to navigate. When you reach a certain level of transactions, most countries will mandate that you have a domestic bank account for payments to go into. (Even if they don’t, working with a local bank will tend to improve acceptance rates, speed up reconciliation, and lower processing costs.)
Other obligations also kick in as higher volume thresholds are met, such as sales and corporation tax. Again, technology is part of the answer; but us good old humans are also needed for our ‘on-the-ground’ knowledge and expertise.
Then you have every expanding SaaS business’ favorite worst nightmare; FX. Hopefully, by now you will have worked out that charging in the local currency should be a priority. If you’re not, then having low and transparent FX charges will soften the lack of customer-centricity. But that still leaves patriating revenues and profits. Unprepared vendors can be left at the mercy of fluctuations in currency prices and obscure FX fees. Smarter ones will make money from getting their timing and FX partner right.
Case study: Kaleido
Kaleido, which provides automated photo and video background removal, was initially put-off international expansion when they came across a +1,000 page guide to different sales tax rules worldwide. By adopting Paddle as their merchant of record (MoR), they were able to offload this burden. The Paddle platform also enabled Kaleido to take payments in multiple currencies and additional payment methods. Within six months of launch they had customers across 119 countries, and 181 countries just 12 months later.
Get your technology in place
Scaling a SaaS business means deploying the right technology. For example, if your expansion plan is about going after downmarket volume, then you need the tools to automate sales, upsells, and manage subscription movements.
Adaptability is also important. Can your front-end architecture and back-end infrastructure really deliver the tailored experiences that today’s customers expect, such as the right payment methods, local currencies, pages in the native language, unique offers, and product suggestions? Personalization could unlock as much as $2.95 trillion for ecommerce retailers alone.
Capacity is key too. The last thing you want is for a piece of technology to grind slower when more users are added. You also want to avoid being stung for outrageous costs for accessing the next level up of service.
And with more transactions comes a bigger threat of fraud, both ‘friendly’ and organized. Without the toolkit to fight back, vendors will be seen as a soft touch. In turn, card networks and issuing banks are likely to take a stricter line on what they consider to be suspicious activity. Genuine transactions will be caught in the crossfire.
All of this requires lots of capabilities; payments processing, subscription billing and management, fraud prevention, tax compliance management, reporting and analytics, customer comms, FX conversion/settlement, and so on. Each of these benefits from automation. That’s hampered if you’re having to stitch together and maintain multiple systems from different vendors. Alternatively, a unified platform with modular capabilities can deliver the automation and scalability to support expansion. Better still if the platform also serves as a merchant of record (MoR), that takes on all the legal and regulatory burden too.
Case study: Matamo
Matamo, a web analytics platform, found expansion hampered by their tech stack. New payment methods couldn’t be adopted, their tools did not cover security and sales tax compliance, and they were vulnerable to fraud. After adopting Paddle’s unified platform, they were able to reclaim time previously spent updating and maintaining third-party plug-ins, and leveraged Paddle’s merchant of record status to offload global sales tax compliance liabilities. They have been able to save two days of engineering per month, and enhanced anti-fraud capabilities have seen payment acceptance rates rise to 98%.
To help you understand what exactly technology and processes are required to build a revenue infrastructure that effectively supports your expansion strategy, we’ve put together this guide - complete with a checklist. Get the guide. (No email required)
Measuring success with metrics that matter
So you planned, and now you’ve executed. How do you know it’s working? It’s time to dig into the metrics.
SaaS expansion plans can use all sorts of KPIs to measure success. Here we look at some of the most popular ones. Each of these benefits from digging deeper than the headline number, to understand what is happening at an individual customer cohort, country, or product level.
Revenue growth rate
Revenue Growth Rate is the increase (or decrease) in sales revenue over a given period of time, expressed as a percentage. Positive revenue growth is an indicator that a business is heading in the right direction. But it is not a very valuable benchmark by itself. For example, if costs are increasing at a higher rate than revenue, then the business is becoming less profitable.
Customer acquisition cost (CAC)
If your expansion plan includes acquiring new customers, then Customer acquisition cost (CAC) is a key metric. CAC is the money a business spends to secure a new customer. It is important because it is a signifier of profitability, along with customer revenue.
Customer lifetime value (CLV)
Customer lifetime value is the amount of profit a customer is expected to bring over the course of their entire relationship. In other words, it will tell you if you’ve got the right sort of customers to achieve your profitability targets. Analysis of CLV should go hand-in-hand with CAC. Together they help a business work out long-term return on investment (ROI).
Monthly recurring revenue (MRR)
Monthly recurring revenue (MRR) is the amount of money a business gets from its subscription customers, recognized on a monthly basis. MRR is an indicator of growth (or contraction). It is also a predictor of future revenue, and so a key input for projecting cash flow and profitability. MRR can be segmented into ‘New MRR’ (the MRR from only your new subscribers) and ‘Expansion MRR’ (the additional MRR generated from existing subscribers).
Net revenue retention (NRR)
Net revenue retention (NRR) (sometimes known as net dollar retention - NDR) takes recurring revenue a step further, by taking into account current customers who not only spend more but also those who downgrade or churn. NRR is expressed as a percentage, with anything under 100% showing revenue contraction. It is an important predictor of how much your business could continue to grow from your current customer base alone.
This guide is part of a three-part series on SaaS revenue infrastructure. Check out Part 1 to master customer acquisition or Part 2 to find out how to build and implement your customer retention strategy.