Expansion Revenue Is a SaaS Growth Cheat Code

Expansion revenue is revenue growth that comes from your existing customer base. It is one of the most powerful growth levers for a SaaS company because it allows you to increase revenue without acquiring new customers, dramatically improving your capital efficiency.

There are two primary ways to build expansion revenue into your pricing model:

1. Align with a Value Metric

A value metric is a unit of measure that aligns the price a customer pays with the value they receive from the product. As the customer's usage of this metric grows, their subscription price automatically scales up.

• How it works: The more a customer succeeds with your product, the more they pay. This makes price increases feel natural and justified.
• Examples:
  • MailChimp: Number of subscribers
  • Salesforce: Number of seats/users
  • SquadCast: Number of recording hours
  • Dropbox: Gigabytes of storage used

Seat-based pricing is a common value metric, but it's only effective if multiple users need unique views or permissions within the app. Otherwise, they can just share a login.

2. Use Feature Gating

Feature gating involves restricting access to certain advanced features to higher-priced plans.

• How it works: As a customer's business matures, they need more sophisticated functionality and are willing to pay for it.
• Examples:
  • Offering a "Tableau integration" only on a premium plan, as you know any company using Tableau has a significant software budget.
  • Restricting SSO, advanced security features, or priority support to enterprise tiers.

While using a value metric is generally more effective because it's directly tied to customer growth, a combination of both methods can also be used. The ultimate goal is to create a pricing structure where customers naturally and willingly pay you more over time as their own business grows and their needs evolve.

Tags: #SaaS #pricing #growth #cheat-codes #expansion-revenue #value-metric #feature-gating