Second Order Revenue
Second Order Revenue refers to the revenue a business earns as an indirect result of the initial sale to a customer. Essentially, it is the revenue generated from a customer after the initial purchase, often through repeat business, referrals, upsells, cross-sells, or other forms of expanded business that stem from the initial engagement. The concept is particularly relevant in the context of Software as a Service (SaaS) companies and other subscription-based businesses.
Here’s a breakdown of different types of revenue:
- First Order Revenue: This is the immediate revenue earned from a new customer’s initial purchase. It’s the direct result of a sales or marketing effort.
- Second Order Revenue:
- Upsells: Additional revenue from selling a higher-tier product or an upgraded version to the existing customer.
- Cross-sells: Revenue from selling complementary products or services to the existing customer.
- Referrals: Revenue earned from new customers brought in through referrals from existing customers.
- Renewals: For subscription-based businesses, revenue from customers renewing their subscription can be considered as second order revenue.
- Third Order Revenue: This concept builds further on the second order. If the customers brought in through referrals (from the original customer) also make referrals, the revenue from these tertiary customers can be thought of as third order revenue.
For businesses, especially those with a subscription model, focusing solely on first order revenue can be shortsighted. The long-term value of a customer (Lifetime Value or LTV) often resides significantly in the second and third order revenues they can generate. This emphasizes the importance of customer satisfaction, quality of service, and relationship management, as these factors significantly influence repeat business and referrals.
Example of Second Order Revenue
Let’s delve into a detailed fictional example to illustrate the concept of second order revenue.
Example: JavaJoy Coffee Subscription Service
Background: JavaJoy is a subscription-based coffee service. Customers can subscribe to receive freshly roasted coffee beans delivered to their doorsteps monthly. JavaJoy offers various subscription tiers and also sells coffee accessories like grinders and mugs.
First Order Revenue:
- Initial Subscription: Sarah, a coffee enthusiast, discovers JavaJoy through an online advertisement. She decides to subscribe to the basic monthly coffee package for $20. This $20 is JavaJoy’s first order revenue from Sarah.
Second Order Revenue:
- Upsell: After two months, Sarah loves the coffee so much that she decides to upgrade to the premium package, which includes a wider variety of beans and costs $30/month. The extra $10/month is part of the second order revenue.
- Cross-sell: JavaJoy sends an email to its subscribers showcasing a new, high-quality coffee grinder for $50. Sarah decides to buy it. This $50 from the grinder purchase is also a part of the second order revenue.
- Referrals: Sarah refers her friend, Mike, to JavaJoy. Mike subscribes to a $25/month package. While this can be viewed as first order revenue for Mike, it can also be attributed as second order revenue linked to Sarah because it was her referral that brought Mike in.
Third Order Revenue (building further):
- Mike, enjoying his coffee subscription, refers his sister, Lisa, to JavaJoy. She subscribes to a $22/month package. This can be viewed as third order revenue since it was Sarah’s initial referral (leading to Mike) that indirectly led to Lisa’s subscription.
Analysis: While Sarah’s initial purchase brought in $20 of first order revenue, her continued engagement with the brand, her upgrade, her purchase of the grinder, and her referral of Mike have generated additional, substantial revenue for JavaJoy.
From this example, businesses can glean the importance of not just acquiring new customers, but also nurturing existing ones. A satisfied customer, like Sarah in this case, can lead to a cascading effect of revenue streams through upselling, cross-selling, and referrals.