by Sam Franklin | September 05, 2022 | 10 min read
SaaS metrics 101 - Expansion revenue / Expansion MRRGet funded
Last updated: October 06, 2022
Expansion revenue is the additional revenue you get from your existing customers. This means you earn more recurring revenue without spending more on customer acquisition. With a high expansion revenue, your SaaS business will become more profitable.
What is expansion revenue?
Expansion MRR stands for expansion monthly recurring revenue. With a good expansion MRR for your SaaS business, you receive regular additional revenue from existing customers through:
Up-sells such as when customers upgrade to a higher-priced plan
Cross-sells (customers buy other products and services from you)
To make this happen, your existing customers should love your product or at least find it useful and valuable to their own businesses. If not, both up-selling and cross-selling will be hard or impossible.
Table of contents
- What does expansion revenue indicate?
- Why is expansion revenue useful for a SaaS business?
- Expansion MRR rate formula
- Expansion revenue example calculation
- Offer related or adjacent products and services
- Offer one main product and several add-ons
- Understand your customer’s journey and requirements
- Bundle, unbundle, and test different plans
What does expansion revenue indicate?
A good expansion revenue tells you that your customers love your product, service, or company. Because they’re willing to spend more, this means they already trust your business and find your product or service valuable.
Also, whenever customers take the upgrade or buy additional subscription plans from you, this might mean their own businesses or budgets are growing. You’re helping them grow, and your revenue also grows and expands.
Why is expansion revenue useful for a SaaS business?
A good expansion revenue can save a SaaS business or further fuel its growth. Although acquiring new customers often comes to mind when we try to grow our business, it’s actually a costly and inefficient approach.
To acquire new customers, you often have to increase your budget in Google Ads and other marketing channels. In addition, your customers might still have to go through this marketing funnel:
It takes some time before customers get through those stages and finalise their purchase or subscription. In other words, your increased ad spending won’t instantly attract new customers. You have to wait before new customers come in because they might still be analysing their business problems, comparing their options, and consulting their managers and stakeholders.
On the other hand, a more efficient approach that may bring instant results is through up-sells and cross-sells. This will increase your expansion revenue, and you will deliver more value to your existing customers. It’s also a way to prevent your customers from going to your competitors. If you have better subscription plans or other complementary products and services that match your customers’ requirements, they are likely to continue to support your business.
How to calculate expansion revenue
To calculate your expansion revenue, you add the revenue you get from up-sells and cross-sells. Keep in mind that this excludes revenue from new customers or their recurring subscriptions to you.
Expansion MRR rate formula
Expansion revenue = Monthly revenue from up-sells and cross-sells.
Expansion revenue = Total monthly revenue minus revenue from new customers and/or their regular subscriptions.
To see the growth or compare this month’s expansion revenue to the previous one, you should compute the expansion MRR rate.
To calculate the expansion MRR rate:
Expansion MRR rate = (Expansion MRRn - Expansion MRRn-1) / Expansion MRRn-1
Where MRRn is for the current month and MRRn-1 is for the previous month
Multiply that by 100, and you get the percentage equivalent. A huge positive number means huge growth, which might prove that you’re doing a great job delivering more value to your existing customers.
The goal here is to see if your up-sells and cross-sells are growing. If your expansion revenue is increasing month on month, this is good news because this tells you that your other products and plans also benefit your customers.
If your up-sells and cross-sells don’t generate results, you might want to modify your offer or try to better understand your customers’ evolving requirements (more about this later).
Expansion revenue example calculation
To calculate expansion MRR, suppose last month you got the following:
Up-sells (2,000 GBP)
Cross-sells (1,000 GBP)
This means your last month’s expansion revenue is 3,000 GBP (2,000 + 1,000).
Suppose this month your numbers are looking better:
Up-sells (4,000 GBP)
Cross-sells (2,000 GBP)
This month’s expansion revenue is now 6,000 GBP (4,000 + 2,000).
To calculate the expansion MRR rate and better see the growth:
Expansion MRR rate = (Expansion MRRn - Expansion MRRn-1) / Expansion MRRn-1
Plugging in the numbers:
(6,000 - 3,000) / 3,000
Multiply that by 100, and you get a 100% expansion MRR rate. It’s also another way of saying that your expansion revenue doubled (comparing this month’s and last month’s). With this growth, it means you did something right this month to achieve those numbers. Perhaps you’ve created an offer or package that’s perfect for your customers. Or, it just proves to you that they find your product or service valuable or critical to their own businesses, and now they’re ready for the higher-priced plans.
What is a good expansion MRR rate for SaaS?
A 10-30% expansion MRR rate is good and reasonable for SaaS businesses. Higher numbers are always better for growth.
However, be careful because focusing too much on getting a high MRR rate might make you push your premium plans and other products too hard on your customers. You might sound too “pushy” in your emails and marketing messages, which can repel customers or affect their perceptions about your SaaS company.
Still, you should watch your expansion revenue along with other important SaaS metrics such as:
Customer acquisition costs (CAC)
Months to recover CAC (payback period)
Customer lifetime value
It’s good to have an expansion revenue equal to around 20% to 30% of your total revenue. This way, you do not completely depend on new customers and “new revenue.” As mentioned earlier, attracting new customers is expensive and time-consuming. It takes time to nurture a lead and turn each one into a paying customer.
Increasing your expansion revenue
If your present expansion revenue is just 1-10% of your total revenue, this tells you that you’re relying too much on customer acquisition and revenue from new customers.
To somehow reduce your dependence on customer acquisition and literally expand your revenue sources, you should look at your existing customers and come up with ways to deliver more value to them (and in return, they’ll subscribe to a higher plan or buy additional products and services from you). To accomplish that, some strategies are:
Offer related or adjacent products and services
For example, customers who get web hosting might also need a professional email account (with their own domain name, such as firstname.lastname@example.org). Later on, they might also want to be able to monetise their content or include eCommerce functionalities in their websites. In this case, you may sell an eCommerce plugin or enable your customers to earn ad revenue.
Offer one main product and several add-ons
For instance, a basic project management SaaS (just one simple dashboard to track the progress of tasks and projects) may also have the following add-ons:
Document and file storage
Integrations with other apps
The goal here is to anticipate your customers’ current and future requirements. For now, they might want to start small and get more products and services as they feel more comfortable with your business.
Understand your customer’s journey and requirements
It’s good to answer the following questions to better understand your customers:
Is it their first time with this type of product/service (e.g. first time creating a website)?
Are they looking for a basic plan or something with everything (a one-stop shop for simplicity)?
Did your customers switch to you because of your better pricing?
What are the customer pain points, and what are their suggestions?
Are your customers individual creators and solopreneurs or a part of a large team?
Your answers, as well as customer feedback, will guide you on how to design a plan that best suits your customers. For instance, if your customers are solopreneurs and your SaaS is project management, you might want to add a basic collaboration feature (just enough to add 2 or 3 members), so they can delegate or outsource some of their tasks to others. For large teams, the collaboration feature and its pricing can scale up as more members are added in.
Bundle, unbundle, and test different plans
To know which plans and price points work best, it’s good to unbundle your current plans. Perhaps your customers only need one or two features of your product, and the rest are just optional (or customers might get them too as they feel more comfortable with your business).
This is one way to encourage subscriptions because customers will only be paying for what they absolutely need. Once they’re in, you can tell them more about your add-ons, related products and services, and premium plans. This can boost your up-sells and cross-sells, which were only made possible by your initial offer (less intimidating to sign up for).
On the other hand, you can also bundle several different features and plans and see if an all-in package works best. Perhaps customers just need a one-stop shop where all the features are already there. Also, right now, they might be thinking about consolidating all their tasks and projects into one app or dashboard. Whether for simplicity or cost savings, you should test different bundles and combinations and let customers choose which one exactly matches their requirements.
How does expansion revenue affect other metrics?
A high expansion revenue:
Increases customer lifetime value (LTV)
Shortens the payback period (months to recover customer acquisition cost or CAC)
Those things happen because customers now are contributing more revenue to your business. Their lifetime value (LTV) increases as they upgrade to a premium plan or add on additional products and services. Here’s an example:
Customers pay 10 GBP a month for your product
They stay for two years on average
Their LTV is 240 GBP (10 GBP times 24 months)
When they upgrade to a premium plan, such as when they subscribe to a 30 GBP per month plan (triple the value of the basic plan of 20 GBP a month), their LTV also triples.
Because of this higher LTV and the amount of money each customer brings in, you have a greater incentive to attract new customers and signups. A high customer acquisition cost (CAC) might also make sense if LTV is high.
Moreover, a high expansion revenue also shortens the payback period (e.g. months to recover CAC). In other words, you get your ROI much faster because of the additional revenue your customers bring in. With this faster ROI and shorter payback period, you improve your cash flow which you can use for further customer acquisition or further product improvement.
Your loyal customers are valuable because of the regular and additional monthly recurring revenue they bring to your business. SaaS companies and those in the subscription business survive and thrive through:
New signups that can turn into a loyal customer base.
Current customers who use your higher-priced plans and buy additional products and services.
In other words, your business's survival and revenue growth depend on continuously acquiring new customers, retaining them, and delivering more value through additional or better services.
Sam founded his first startup back in 2010 and has since been building startups in the Content Marketing, SEO, eCommerce and SaaS verticals. Sam is a generalist with deep knowledge of lead generation and scaling acquisition and sales.