Expansion Revenue is the extra money a company makes from its existing customers as they spend more on its products or services. Unlike new revenue from new customers, expansion revenue comes from getting current customers to buy more or upgrade what they already have.
What Expansion Revenue Includes:
- Upselling: When current customers buy a more expensive version of something they already have. For example, if someone upgrades from a basic to a premium version of a subscription service, the extra cost is expansion revenue.
- Cross-Selling: When customers buy additional products or services that go along with what they already purchased. For instance, if a customer who bought a phone also buys accessories like cases or headphones, that’s expansion revenue.
- Increased Usage: When customers use more of a service and pay more for it. For example, if a company offers cloud storage and a customer decides to buy more space, the extra money is considered expansion revenue.
How to calculate Expansion Revenue:
To figure out expansion revenue, you compare the amount of money you’re making from existing customers this period with what you made from them in the previous period.
The formula of Expansion Revenue is:
Expansion Revenue = Revenue from Existing Customers This Period − Revenue from Existing Customers Last Period
For example, if a company made $50,000 from existing customers last quarter and $60,000 this quarter, the expansion revenue is:
Expansion Revenue = $60,000 − $50,000 = $10,000
Why Expansion Revenue is Important:
- Growth Indicator: It shows that existing customers are happy and willing to spend more, which is a good sign of growth for the company.
- Customer Loyalty: High expansion revenue often means customers are satisfied and trust the company enough to spend more. It reflects well on the company’s relationship with its customers.
- Cost-Efficiency: It’s usually cheaper to get more money from existing customers than to find new ones, so this can be a more cost-effective way to grow revenue.
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