Impact Pricing Blog

Why Do Subscription Companies Underemphasize Expansion?

Of the three revenue buckets subscription companies need to manage, acquisition, retention, and expansion, expansion is the one most often ignored.
Is your company ignoring expansion?
When is the last time you made price adjustments?
When is the last time you adjusted the offers you make to the customers?
What is the last marketing campaign targeted at existing customers to get them to upgrade?
Have you chosen the best pricing metric?
All of these are tactics used to grow the revenue coming from your current customers.
The next question is do you care?  The short answer should be yes.  The fastest growing subscription companies are able to grow the revenue they get from existing customers by over 40% per year.  As your overall revenue increases, growing revenue by growing customers becomes even more important than winning new customers.
If expansion is so important, why do firms ignore it so often?  The answer is probably that we spend more time doing what is urgent rather than what is important.

Revenue Buckets

When a company launches a product, the only thing that matters is acquisition, winning new customers.  This is what traditional businesses always do and subscription companies must start here. They invest in sales and marketing to win deals and grow the customer base.  This is obvious and it’s the first revenue bucket you need to focus on.
Once a subscription company has customers, some leave.  The company realizes pain and wants to stop it as much and as quickly as possible, so they focus on retention.  They want to reduce churn as much as possible.  At this point they launch a customer success department and focus on on-boarding and usage.  Happy customers remain as subscribers.
These first two revenue buckets, acquisition and retention, are obvious and they are painful when they aren’t going well.  They are both urgent and important.  As we all know from our own to do list. Both urgent and important always get done first.  Over time they may become less urgent or less important, but boy are they obvious in the beginning.
The third revenue bucket, expansion, is never urgent, but it becomes extremely important.  As companies get bigger, focusing on expansion is even more important to their future growth.  The following graph is a reasonable representation of how these three buckets move over time (or company size).  Notice that the bigger the revenue, the more important expansion becomes.
The problem with expansion is it’s never urgent, and it’s not even important when first launching a product.  Is it any wonder firms forget to focus on it?
Have questions or comments? Interact with Mark Stiving on LinkedIn.
Tags: pricing strategy, subscription pricing

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