Venture Capitalist at Theory

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2 minute read / Dec 11, 2018 /

Which is More Important: New Account Growth or Account Expansion?

If you have one marketing dollar to spend on your startup’s growth, should you spend it on acquiring a new customer or on expanding an existing customer?

Mining the existing customer base for customer expansion seems very logical. Customers know your product and your sales team, so increasing the account value should be easier.

Plus, the strategy is successful in practice. The PacCrest survey suggests upsell drives somewhere between 8-26% of new bookings for SaaS companies, depending on the scale of the business. The larger the business, the greater the fraction of new bookings from upsell.

But at the early stages, investors value new logo acquisition more than customer expansions by investors. Why? There are three reasons.

First, acquiring new customers is one of the hardest things to do efficiently in SaaS. And it’s getting harder. Scalable new customer acquisition suggests the business will continue to grow at attractive rates. New customer acquisition requires product market fit, a well run go-to-market function and differentiation.

Second, a customer base has a maximum potential. If a business has 100 customers, and each customer at most can pay $100k, the total addressable revenue is $10M. Growth is capped. Even if all that $10M can be efficiently acquired, without new customers, the company’s value won’t appreciate materially.

Third, in the end, distribution is the only long-term moat. A company that can’t achieve broad distribution to cross-sell products isn’t defensible. The competitor that figures out distribution will ultimately win the biggest chunk of the market.

Account growth is also important, of course. Best in class companies typically achieve 120% negative net expansion. But in the early days, maximizing account value shouldn’t be the focus.

Though it’s the harder path, spending that marketing dollar on new customer acquisition is the better way to build value for venture-backed startups.

Photo by Daniel Lincoln on Unsplash

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