The stock prices at Alteryx (NYSE:AYX)Twilio (NYSE:TWLO), and Veeva Systems (NYSE:VEEV) have all been on a tear over the past two years, with all three companies soundly beating the market. These software-as-a-service (SaaS) businesses have different customers, but all three use a "land-and-expand" strategy to help power revenue growth. 

What is "land-and-expand," how is it used, and what should investors look for to know whether it's working? 

AYX Chart

AYX data by YCharts.

The "land and expand" growth engine explained

SaaS companies often allow customers to use products for a free trial period, or with a limited set of functions, in exchange for just creating an account. If the user likes the product, they may choose to pay a small subscription fee to use it longer or get more features; this is called "landing" a customer. From there, SaaS companies will watch whether other users from the same company sign on for a subscription; eventually, after a certain number of users or functions, the SaaS provider's sales team reaches out to the customer to discuss opportunities to "expand" the relationship. 

Computer network represented by figures in nodes connected by lighted lines.

Image Source: Getty Images.

This means that well before the initial sales contact is made, the target company already has experienced user/advocates who are familiar with the product. This allows the sales teams to be more effective, spending less money on attracting customers and more time developing the relationship. Money saved can be redirected into development efforts to make the product even better and accelerate the "land-and-expand" process. 

Let's dive into three companies using this strategy to grow.

Twilio drives growth through increased transactions

The Twilio platform allows software developers to easily add communication tools to existing software-driven processes. It can facilitate a call from your Lyft driver, a text notification that your medical prescription is ready, or an email reminding you of your upcoming dentist appointment.

Twilio caters to the needs of software developers, with CEO Jeff Lawson explaining that a software engineer could build a prototype of a program  "in an afternoon" to show off the platform's capabilities. This prototype demonstration or a small initial implementation often serves as a catalyst for potential customers to reach out to a Twilio sales rep. Customers are charged for each communication transaction (call, text, or email) that is sent through the platform. When a customer increases the number of communication transactions, Twilio's revenue increases. Additional use cases drive more transactions and help increase its dollar-based net-expansion rate (DBNE), which is a great measure of the revenue growth the average customer provides.

The DBNE is calculated by measuring how much more customers spend in the current quarter than they did a year ago. 

Metric

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Dollar-based net-expansion rate

137%

145%

147%

146%

140%

Year-over-year revenue growth 

54%

68%

77%

88%

90%

Source: Twilio earnings announcement.

The growth of this metric at more than 100% shows that customers are significantly expanding their use of Twilio-based communications, helping to drive the company's tremendous revenue growth.

Alteryx expands by adding users 

Alteryx's software is a data analytics platform that enables analysts, scientists, and other data workers to be more productive. The company "lands" an end user through a free trial of its Alteryx Designer product, and usage spreads through "word-of-mouth, collaboration, and standardization of business processes." This organic expansion is partly thanks to the profound impact the product can have on a data analyst's job. 

In the company's recent investor day presentation, chairman and CEO Dean Stoecker relayed a success story he heard directly from a customer. "I want you to know that you changed my life," the customer said. "You gave me the opportunity to love my job again. I'm solving complex problems in no time, I got a promotion, make more money, and I've been able to put my kid through college." With these kinds of accolades, it's not surprising that once Alteryx's software is "discovered" by one individual at a company, it spreads.

Metric

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Dollar-based net-expansion rate

129%

131%

132%

134%

133%

Year-over-year revenue growth 

54%

59%

57%

51%

59%

Source: Alteryx earnings announcements.

Additionally, Alteryx's sales team works with customers to determine strategic uses, new use cases, and users that might help fuel growth within an organization. Solid DBNE metrics show that "land and expand" is working well here.

Veeva is growing through product and user adoption

Veeva's largest product by revenue, Vault, supports the development and regulatory processes of life science companies from end to end. A potential customer might first contact Veeva because they've observed a gap in process at a regulatory agency or are experiencing frustration with departmental inefficiencies. If Veeva is able to install a module that solves the customer's first challenge, the door is opened for other areas of business and a longer-term relationship. 

The strategy is working: Over the past seven years, the number of customers has grown by 9.4 times, but the number of "vaults," or products installed, is 15 times higher. Compounding this growth with additional users for each product has meant that annual revenue for each of customer cohort has grown significantly; the 2013-2014 cohort has expanded its annual revenue to be an impressive 20 times higher than its first year.

Stacked bar chart comparing first year of cohort to Q2 2020 revenue. Includes cohorts from 2013-2014, 2015, 2016, 2017, 2018, and 2019. The 2019 cohort has the least annual revenue growth at 1.3x and average vault products per customer of 1.9. Each cohort results are improved and the cohort ages. The earliest cohort (2013-2014) has 20x the revenue and 3.8 vault products per customer.

Vault growth by annual cohort. Source: Veeva investor day presentation (slide 57)

Getting more out of existing customers has been key to powering the company's fourfold growth in annual revenue since 2015.

Is land-and-expand working?

These three SaaS companies are executing tremendously -- but when any company touts its ability to land and expand, investors should look beyond the bolster. Seek out metrics that provide proof the strategy is working, such as dollar-based net expansion rates greater than 100% or customers that increase their spending over time.