Subscription Economy™

How much of your revenue should be coming from your existing customer base?

  • 1.  How much of your revenue should be coming from your existing customer base?

    Posted 8 days ago
    Edited by Michelle Marshall 8 days ago

    How much of your subscription revenue should be coming from your pre-existing customer base as opposed to brand new customers? 25%? 50%? How about 75%?

    In fact, 70 to 80% of your revenue should be coming from your existing customers. That's according to a new report from the Subscribed Institute and the Boston Consulting Group, based on anonymized and aggregated usage data from the Zuora platform.

    That figure might sound surprisingly high to lots of people. After all, you can't have a successful business without landing new customers, right? If revenue dictates resources, should I really be applying three-quarters of my efforts to servicing my existing client base? Given that there's always going to be churn, shouldn't I concentrate on feeding the top-end of the funnel?

    But as John Pineda, Partner and Director at BCG and co-author of the study notes, "Technology companies that focus on landing a bunch of new accounts, without taking care of them will end up losing customers, as well as the incredible growth they represent. Pricing to value is key to improving core business profitability– and the subscription model makes it easy." Of course, you need to land in order to expand. But according to our research, we've found that the best SaaS businesses invest more in the "expand" part of that equation than their peers, resulting in truly sustainable growth rates and rock-solid financial stability.

    Our research shows that enterprise SaaS companies in our database get almost 1.7x the ARR growth of other subscription companies, and that most of that growth advantage is from better retention and what we call "4D revenue expansion." The term 4D expansion means expanding revenue across four dimensions: upselling,cross-selling, growing volume, and capturing price increases.

    In other words, they create more value for their customers by generating revenue with the following four sales motions:

    • Upselling – Moving customers to higher-value tiers within a good-better-best suite of services.
    • Cross-Selling – Leading the customer to complementary products and services in adjacent areas.
    • Usage Increases – These often come from higher adoption rates within a department as well as within the entire enterprise (more business units, more geographies, and so on).
    • Price Increases – These can take many forms, including year-on-year escalators built into contracts and a mix of value-added incentives a buyer can use to partially offset nominal price increases.

    As the report notes, "The bottom line here is 'it takes a village' to create sustainable growth, and retaining your village(your existing customer base) is the best source for organic expansion." Here is a great illustration of that village in action:

    Here you have two different kinds of subscription companies, both starting from the same growth base of 100. If you follow the top and bottom charts from left to right, you'll see that the SaaS companies edge slightly ahead of the other companies from better new customer growth (22 versus 19), but they break out into a huge lead from 4D expansion (8 versus 4). After a roughly even churn rate for both categories, the SaaS companies finish up at 20% growth as opposed to 12%. That's a big difference!

    So by all means, keep selling. Keep landing those new deals. Keep ringing that bell. But the long-term goal should be an emphasis on farming, as opposed to hunting. In other words, growing value for your existing customer base. That's where the real gold lies.

    What's more, concentrating on landing versus expanding doesn't mean you're slowing down. In fact, it means quite the opposite!

    As the report also notes, when successful subscription businesses grow bigger, they actually speed up - best-in-class SaaS companies with more than $100 million in ARR consistently outperform companies with less than $10 million in ARR in overall growth (+14%), average net expansion (+12%), upsell revenue expansion (+10%), new customer growth (+2%), and churn (3% lower).

    That's the beauty of a maturing subscription model. As you grow larger, you can blow the roof off your key financial metrics even as the rate of your new customer acquisition slows down.

    There's lots more to learn in the study! You can download it here



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    Michelle Marshall
    Zuora
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