̶D̶i̶v̶i̶d̶e̶ Expand and Conquer.
Expansion MRR is the amount of money added to your monthly recurring revenue from existing customers through upsells, add-ons, etc.
A high expansion MRR indicates that your customers derive value from your SaaS product and are willing to spend more on it.
In this article, we’ll cover what expansion MRR is, how to calculate it, benchmarks, and tips. We’ll also highlight why you shouldn’t track the metric in isolation and discuss a few related metrics.
This Article Contains:
- What Is Expansion MRR?
- How to Calculate Expansion MRR
- Expansion MRR Rate Benchmarks with Practical Applications
- How to Boost Expansion MRR
- The Benefits of Tracking Expansion MRR
- Why You Shouldn’t Track Expansion MRR in Isolation
- 7 Other Related Metrics
Let’s go!
What Is Expansion MRR?
Expansion MRR (monthly recurring revenue) is the additional revenue you earn from your existing customer base.
Why is this so beneficial?
SaaS companies can earn expansion revenue without incurring additional customer acquisition costs.
Here are the different types of expansion MRR:
- Upsells: Encouraging existing paying users to upgrade to a more expensive plan, also known as upgrade MMR.
- Cross-sells: Selling complementary or supplementary products to customers that are not part of the core offering
- Add-ons: Selling customers additional features or functionalities to enhance their experience with the primary product
What Type of Company Should Use This Metric, and How Often?
Expansion MRR should be calculated by subscription-based companies that offer upsells, cross-sells, or additional features to their existing customer base.
The frequency of calculating expansion MRR can vary depending on your company’s business model and goals.
But it would be best if you considered calculating expansion MRR monthly.
Why?
This will allow you to track the incremental revenue generated from upsells and expansions month-on-month. This way, you get more frequent insights into what works, what doesn’t, and what needs to be done to improve the process.
Next, we’ll discuss how to calculate the expansion MRR.
How to Calculate Expansion MRR
Here’s the expansion MMR calculation:
Expansion MRR = Total monthly revenue – (Revenue from new customers and regular subscriptions)
To compare the expansion revenue of a given month with the previous month, you’ll need to calculate the expansion MRR rate:
Expansion MRR rate=(Expansion MRR of current month – Expansion MRR of previous month) / Expansion MRR of previous month * 100
For example, let’s imagine that your expansion MRR was $1,000 in the previous month and $1,300 in the current month.
Using the above formula, your expansion rate would be:
($1,300 – $1,000) / $1,000 X 100 = 30%.
Next, we’ll cover the benchmarks you should aim for.
Expansion MRR Rate Benchmarks with Practical Applications
A reasonable MRR expansion rate lies between 10-30%, but it can vary depending on your company’s stage.
Here’s a closer look:
- > 20%: Only the best, high-performing SaaS companies can achieve a long-lasting expansion MRR growth rate of over 20%.
Practical application: At this stage, the company should identify the contributing factors and further optimize those strategies while exploring new expansion opportunities.
- 16–20%: An expansion MRR rate of 16–20% is an excellent growth rate for any SaaS business. But such MRR growth rates are usually unsustainable, and most companies can only maintain them briefly before they begin to level off.
Practical application: Here, a SaaS company should focus on optimizing pricing strategies, nurturing customer success, and capitalizing on expansion opportunities to sustain and enhance growth.
- 10–15%: A MRR growth rate between 10-15% is considered the average. Startups should aim higher but maintain these levels once established.
Practical application: Companies can boost their growth rate by further nurturing existing customer relationships, designing targeted marketing campaigns, and identifying areas of improvement.
- < 10%: An expansion MRR growth rate below 10% may indicate that you need to rework your upselling and cross-selling strategies.
Practical application: Companies can improve their expansion MRR growth rate by enhancing product value, adjusting pricing, gathering customer feedback, and re-evaluating product-market fit.
All in all, you should aim for expansion revenue that accounts for roughly 20–30% of your total revenue. This approach ensures your business doesn’t rely solely on new customer acquisition.
Is your expansion MRR rate not where you want it to be?
Not to worry — next, we’ll cover a few tips to help you improve that number.
How to Boost Expansion MRR
The right upselling, cross-selling, and in-app messaging strategies can encourage customers to spend more on your product.
Here’s a closer look at these strategies:
1. Contextual In-App Messaging
This entails engaging active users by sending them personalized, contextual messages that nudge them to complete particular actions like upgrading to the premium plan.
Here are three ways you can do this:
- Banners: Banners are always-on messages that prompt users to take your desired action. For example, Slack has a banner telling users they’ve reached the end of the 10,000 most recent messages. The upgrade button is also present, allowing users to solve their problems by upgrading.
- Modals: Unlike banners, modals only appear if a user takes a certain action. For example, you can display a modal if a free user attempts to use a premium feature. Another option is to leverage product analytics to determine which features your free users use the most. In doing so, you can remind users that they’re about to reach their daily limit. This can prompt users to upgrade to the premium plan.
- Chatbots: Chatbots can offer customers personalized add-on recommendations based on previous purchase behavior and product analytics. But that’s not all. Chatbots can also provide exceptional, round-the-clock customer service and nudge users to upgrade even when sales reps aren’t around. It’s no wonder 80% of customers have a positive experience with chatbots!
Remember to reserve in-app messages and targeted marketing materials for customers well into their user journeys or have reached their “aha! moment.” Doing can help you get the best results and reduce customer churn.
2. Segment Customers
Segmenting customers can help you target users with a high probability of upgrading, boosting your conversion rates.
For example, as a B2B SaaS company, you can group users according to company size, geographic location, a user’s purchasing authority, and more. B2C companies can look at age, gender, profession, income, etc.
Then, you can engage with those customer segments with personalized marketing material and in-app messages to boost upsells and cross-sells.
3. Offer Discounts and Free Trials
SaaS companies can drive revenue growth by offering free trials that showcase the product’s premium features.
How?
Once the free trial ends, users will have grown accustomed to the premium features and the value they offer. As a result, there’s a possibility that they’ll upgrade once the trial ends or when they see an in-app upsell prompt.
Temporary discounts can incentivize customers to sign up or upgrade to a higher-tier plan, increasing your upgrade MRR in the short term. But it’s important to note that discounts may not be sustainable in the long run.
Why?
Discounts may attract price-sensitive customers who are less likely to stick around or may not be the right fit for the product.
4. Bundle and Unbundle Packages
Experimenting with plans and price points can help determine what works best for your customers.
Here are two ways to do this:
- Package bundling: Create an all-inclusive package by bundling several different features and plans. This way, customers get a comprehensive solution where they can consolidate all their tasks and projects.
- Unbundling packages: Unbundle plans so customers can access the few features they need. This can boost signups since customers can just pay for their desired features. As their own operations begin to scale and they grow more comfortable with your product, you can promote add-ons, related products and services, more expensive plans, and more.
5. Gather Customer Feedback
Monitoring customer feedback can help you develop new features to solve customers’ pain points. This, in turn, can help improve your upselling and customer retention strategies.
Additionally, understanding your customer’s goals and what they wish to achieve with your product can boost customer success and lifetime values.
Here are a few ways to gather customer feedback:
- Gather customer feedback through in-app surveys
- Use metrics like net promoter score (NPS) and customer satisfaction score (CSAT)
- Ask every unhappy and churned user why they canceled their subscription and what improvements they want.
Next, let’s find out why you should be tracking this metric in the first place.
The Benefits of Tracking Expansion MRR
Tracking the expansion MRR metric can help SaaS companies understand how happy their customers are and the effectiveness of their expansion strategies.
But that’s not all.
Expansion MRR can also help you gain insights into new feature releases’ impact and future revenue growth.
Here’s a closer look:
1. Get Insight into Customer Satisfaction
Gaining additional recurring revenue from your existing customer base indicates that there are customers who are highly satisfied with your product and loyal to the brand.
But that’s not all.
When customers start to upgrade and buy additional products from you, it may mean their operations and budgets are expanding. In other words, your product is helping them grow.
This way, a high expansion MRR rate may indicate high customer lifetime value, which can help your business grow sustainably.
2. Determine How Successful Feature Roll-outs Are
Tracking expansion MRR can also give you insight into the success of a new feature launch, upgrade option, or pricing plan.
How?
By monitoring expansion MRR during a feature roll-out, you can understand how users react to it. An unchanged expansion MRR may indicate that the feature isn’t very relevant, while an increase may indicate that the feature is a hit amongst your customers.
3. Boost Revenue in a Cost-Effective Way
Another reason expansion MRR is an excellent SaaS metric because companies don’t need to incur substantial costs to earn additional recurring revenue.
Why?
Since expansion MRR relies on the ability of your sales and marketing teams to sell higher plans and add-ons to your existing customer base, there are no customer acquisition costs.
But you can expect more minor expenses like sales, marketing, and product development costs.
4. Know Whether Your Company Can Grow Sustainably
A growing expansion MRR rate indicates that your SaaS business has the potential to grow sustainably.
According to Christoph Janx (Point Nine Angel VC), expansion MRR indicates that a SaaS company can deliver value to its customers and monetize that value.
Most established, high-performing SaaS companies generate a significant portion of their growth from existing customers. In fact, the Finmark SaaS Metrics Benchmark Report found that the highest-performing SaaS companies generate 62% of their new MRR from expansion revenue — 4.4x more than low-performing companies.
But to truly understand if your business is growing sustainably, you must track additional metrics alongside expansion MRR.
Here’s why:
Why You Shouldn’t Track Expansion MRR in Isolation
SaaS companies shouldn’t solely rely on the expansion MRR metric to gauge customer satisfaction.
Why?
The expansion MMR calculation doesn’t show the number of customers you lose monthly. In other words, while certain customers spend more, you could lose another group of customers simultaneously.
As a result, you need to look at your contracted MRR and your net revenue churn rate alongside expansion MRR:
Contracted MRR = Downgrade MRR + Cancellation MRR
Net Revenue churn rate = (Churned MRR- Expansion MRR) / Beginning MRR * 100
Next, you’ll need to determine if the additional revenue from your current customer base is greater than the total revenue you’re losing. This is also known as negative churn:
Negative churn rate = (Revenue from expansion – Churned MRR) / Starting MRR * 100
If you end up with a negative churn rate, it indicates that your SaaS company’s expansion revenue offsets the revenue lost from churn.
7 Other Related Metrics
Additional metrics to track alongside expansion MRR are:
1. Customer Churn Rate
Customer churn rate tracks the percentage of users who stop using your product.
Churn rate = number of customers lost / number of customers at the month’s start * 100
2. Customer Lifetime Value (CLV)
Customer lifetime value predicts the total money a new customer will spend on your product throughout the entire business relationship or customer lifespan.
CLV = Average value of a purchase * Annual purchase frequency * Average customer lifespan (years)
3. Customer Acquisition Cost (CAC)
Customer acquisition cost is the total money a company spends (marketing and sales) to acquire one customer.
CAC = Total costs of sales and marketing / Number of customers acquired
4. Gross MRR Churn Rate
The gross MRR churn rate tracks the percentage of lost MRR from your current customer base due to cancellations and downgrades.
Gross MRR churn rate = (Downgrade MRR + Cancellation MRR) / Total MRR at the start of the period * 100
5. Net MRR Growth Rate
Net MRR growth rate is the net increase or decrease in monthly recurring revenue from one month to the next.
Net MRR growth rate = (Net MRR of current month – Net MRR of last month) / Net MRR of last month * 100
6. Average Revenue Per Account (ARPA)
Average revenue per account calculates the expected revenue per customer account or user over a given month (MRR or monthly recurring revenue) or year (ARR or annual recurring revenue)
ARPA = Total MRR or ARR over a certain period / Number of accounts over the same period
7. Reactivated MRR
Reactivated MRR is the total recurring revenue generated from previously churned users who reactivate their account or resume a subscription.
Reactivated MRR = Sum of MRR from customers that previously churned
Boost Your Bottom Line with Expansion MRR
Expansion MRR is an essential SaaS metric for companies that want to gauge customer satisfaction and loyalty.
Additionally, having a clear expansion strategy in place gives SaaS companies an easy way to drive additional revenue growth through their existing customer base.
Use the above tips to improve your upselling and cross-selling strategies. And remember to track other key metrics like net revenue churn rate alongside expansion MRR.
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