What is Account Expansion?

What is account expansion

Account expansion is the increasing revenue and deepening of relationships within a customer base. It means that rather than focusing on gaining new customers, businesses seek new avenues to improving relationships with current clients. It wouldn’t be wrong to say that account expansion emphasizes customer needs and data insights to offer customer-centric solutions.

By focusing on existing customers, businesses ensure expansion of revenue inflows, thereby increasing customer loyalty and lifetime value per customer. If done accurately, account expansion has a lot of potential to enhance customer-business relationships.

An account manager performs account expansion by upselling or cross-selling additional products to an existing customer. Successful account expansion requires a complete understanding of customer segments and strategically devising strategies to address customer needs. Data-based decisions can help to detect any areas of growth opportunities and help gauge the business success.

Thus, maintenance of strong customer relationships is important for expanding accounts and ensuring that they are welcoming to new offers. It is important to overcome any challenges on the way, such as customer resistance or internal pushback, to implement successful account expansion.

How does account expansion drive revenues?

For a SaaS-based business environment, account expansion has a critical role to play. It helps in revenue growth and is an effective method for keeping the existing customer base satisfied. It is a cost-effective method and gauges sustainable revenue gains. Some ways it helps:

Increased Customer Lifetime Value

By selling more to the existing customers, you extend engagement with your product. This leads to a higher revenue gained from each customer over their relationship with your company.

This method is far more cost-effective than gaining new customers, as gaining more customers requires more resources and costs more than retaining existing ones.

Upselling and Cross-Selling

Upselling means encouraging current customers to upgrade their plans to higher-tier plans with more features. This leads to an increased average revenue per account. On the other hand, cross-selling complementary items or services also helps increase revenues.

Increased Usage and Consumption

Many SaaS models are usage-based, encouraging customers to use more of the product, thereby increasing revenue. This is often done by showing customers the value of increased usage of products or services.

Reduced Churn

Customers who expand usage of existing offers are less likely to churn. They are so invested in your products/service that it gets uneasy to resume a service/product use. Strong customer relationships and a good customer success team reduce churn.

Referrals

Satisfied customers are your powerful advocates, as they are likely to offer positive feedback, reviews, testimonials, and referrals, which can ease new customer acquisition.

How is expansion rate calculated?

When referring to “expansion rate,” particularly for SaaS companies, it usually pertains to the “expansion monthly recurring revenue (MRR) rate.” Let’s break down how it’s computed:

Understanding Expansion MRR

Expansion MRR is the incremental recurring revenue from current customers. This comes from:

Upsells (moving up to more expensive plans)

Cross-sells (buying additional products or services)

Add-ons (adding more features)

Calculating the Expansion MRR Rate

Expansion MRR Rate = [(Expansion MRR at the end of the period – Expansion MRR at the beginning of the period) / Expansion MRR at the beginning of the period] x 100

Explanation:

You take the difference between the expansion MRR at the end of a given period (e.g., a month) and the expansion MRR at the beginning of that period.

Then you take that difference and divide it by the expansion MRR at the start of the period.

Last, you multiply the result by 100 in order to convert it to a percentage.

For instance, your expansion MRR at the start of the month was $10,000.

At the end of the month, it was $12,000.

Given is how you would calculate the rate:

($12,000 – $10,000) / $10,000 = 0.2

0.2 x 100 = 20%

In this case the expansion MRR rate is 20%.

Who is responsible for driving account expansion?

Both the customer success and sales teams of a company are equipped to manage growth. They just need to approach it differently because they both have different kinds of relationships with the customers.

Due to the sales process, the true potential of a sales team is in acquiring customers and not expanding customers. Conversely, customer success teams are more aware of customers’ goals and engage with current customers. This enables them to identify further products or features that better meet customer needs and generate growth.

Another aspect to keep in mind is scalability, where both sales and customer success teams lag behind. In these instances, marketing automation contributes significantly.

The accountability for driving account growth is usually in a shared arena but with well-defined responsibilities. Though the initial concern of the sales team is around acquisition, it is also their responsibility to help spot early opportunities for expansion throughout the sales cycle. Nevertheless, the major stimulus for sustained account growth is normally the customer success team.

They are well-placed to develop strong relationships, learn changing customer needs, and actively suggest solutions. This is not to say the sales team is left out; they could be engaged in closing large expansion deals or managing complicated upgrades.

A good account expansion strategy, however, needs a combined effort, with ownership, clear processes, and transparent communication between sales, customer success, and marketing.

What are some best practices for account expansion?

There is massive potential for growth in selling to existing customers for increased ROI. However, expansion is not for every client. You must understand your customers before investing in account expansion efforts. You can bring into practice these account expansion ways for best outcomes:

Opting for the right clients

Not every new customer is a win, particularly for the SaaS firms. If your salespeople are scrambling to get anyone and everyone to subscribe to your SaaS, then they’re likely signing up new clients who are going to churn. This can be a costly mistake for long-term goals.

The truth is that your expansion strategy isn’t suitable for everyone. A judicious sales strategy acknowledges this and focuses on prospects who are a proven fit. This ensures you’re spending money acquiring customers with great lifetime value (LTV).

Customer success is a priority.

Customer success means an account receives the desired outcome by utilizing your product or services. It is about making sure customers realize their objectives, be it more revenue, more efficiency, or better customer experience.

By putting the customer first, companies can create long-term relationships, generate loyalty, and eventually, increase revenue through upselling, cross-selling, and word of mouth. Customer-centricity also offers insightful feedback that allows companies to develop their offerings, eliminate pain points, and remain competitive in the marketplace.

Sell if needed.

It is important for customer success managers to know that a customer only cares about what services that the company is offering and not the revenues. Upselling or cross-selling for the sake of meeting some benchmarks at the expense of customer success can negatively influence your business.

Clients who realize that they have been sold an unnecessary item or a service will downgrade their plan or will reconsider using your services. Thus, it is not recommended to suggest unnecessary upgrades or purchases that are irrelevant for the customer, as it is likely to frustrate them.

On the other hand, managers who really care about customer retention and gauge techniques on products that the customer really needs can bring in more revenues with ease. This also establishes brand loyalty and satisfaction among customers.

Reward your team.

Consider eliminating quotas for CSMs entirely. This will allow them to focus on customer success without being pushed by a conflicting influence. Thus, introducing a commission model for your CSMs can be one of the account growth strategies.

Customer success commissions are a compelling substitute. CSMs incentivized for sales that result in the client’s next milestone are more likely to spend time vetting the ideal upsell and cross-sell prospects. They also won’t waste any energy selling to customers who wouldn’t be helped by an additional product.

What are the benefits of account expansion vs. acquiring new customers?

Among some of the benefits of account expansion as opposed to acquiring new customers are:

Cost effective

When you focus on expansion rather than on acquisition of new customers, you save up money and resources. The costs of engaging with current customers are lower than those of acquiring new ones. Thus, by investing in account expansion tactics, businesses can increase revenues while optimizing marketing budgets.

Customer satisfaction

Growing existing accounts creates higher loyalty and satisfaction with customers. If you spend your money building up the value for your existing clients, it brings more engagement and better retention levels. Happy customers who already know your product or service are more likely to suggest it to people in their inner circle, generating organic growth and minimizing the demand for huge customer acquisition campaigns.

Enhanced forecastability

Account expansion allows you to better predict future earnings and gain stability. By improving retention rates and client relationships, businesses can enjoy a stable revenue inflow. This reduces chances of customer churn and offers clarity on insights about those accounts that are generating consistent revenue on a month-basis versus those with fluctuating subscriptions to your products.

What are the pitfalls to avoid for account expansion?

Customer Segmentation

One common pitfall when cross-selling or upselling is treating all customers as the same. You must note that all customers have unique needs, and not everyone is interested in using additional products or services. Maybe you are considering an offer for them that they do not need.

Attempts to cross-sell or upsell can create a sense of frustration for your business. It can go to wasted efforts, thereby annoying customers and losing trust. Thus, you must segment customers based on usage patterns and interests.

Limiting customer choices

One of the significant mistakes you make while cross-selling or upselling is to offer one single option to customers. It can confine their choices, reduce perceived value, and incur resistance. It is best to offer multiple options to customers to cater to different needs and preferences, as well as budgets. It can increase customer engagement, sense of curiosity, and sense of ownership over products.

Role of Referrals

Another way of cross-selling or upselling efficiently is to require referrals from existing customers. They are helpful in building credibility and trust as they come from satisfied customers. In most cases, the sales team forgets to ask for referrals or fears asking due to a sense of rejection. It is best to approach your most satisfied customers, who frequently purchase from you, to ensure your brand reaches a network of contacts that can gain from your offering.