To reach their ever-evolving revenue growth targets, SaaS businesses have been primarily putting the bulk of their efforts into acquiring new customers.
This has created a bit of missed opportunity when it comes to another great way to strengthen your growth — revenue expansion.
But how do you measure and evaluate your revenue expansion efforts? Well, there is a metric just for that, and it bears a rather unsurprising name: expansion MRR.
What Is Expansion MRR?
Expansion Monthly Recurring Revenue is the additional revenue generated by your existing customers in a given month, compared to the month before.
As the “existing” part suggests, it excludes the revenue you generate from newly acquired customers, as they are not affected by your expansion efforts.
Instead, expansion revenue comes from your, well, account expansion activities, such as:
Upsells: Selling your existing customers a more expensive version of your product.
Cross-sells: Selling your customers an additional product or service that’s not part of your main offering.
Add-ons: Selling your customers an additional “extra” for your main product that doesn’t otherwise work as a standalone offering.
Expansion MRR may also include reactivation revenue, which you get when a previously churned customer comes back to you. However, this categorization is a bit murky as reactivation revenue can also count as new business.
Similarly, renewal revenue does not count towards your expansion MRR, as it is typically unaffected by your expansion efforts.
How to Calculate Expansion MRR + Benchmarks
Calculating your expansion revenue is fairly simple. At the end of the month, add all your revenue from upsells, cross-sells, add-ons, and reactivations (optional) together. Then, add all your expansion revenue at the start of the month and subtract it from the expansion revenue at the end of the month.
Now, that doesn’t tell you much. Even if you know what your expansion revenue is, you can’t really evaluate the effectiveness of your expansion efforts. To do that, you need to be able to benchmark it against industry averages.
That’s where the expansion MRR rate comes in — a far more universal and hands-on metric. In fact, when talking about expansion revenue, most businesses really mean the rate. Here’s how you calculate it:
Let’s illustrate this calculation with an example. Let’s say your expansion revenue at the start of the month was $8,000, while your expansion revenue at the end of the month is $12,000:
$12,000 – $8,000 = $4,000
$4,000 / $8,000 = 0.5
0.5 * 100 = 50% Expansion MRR
50% would be an outstanding result — which brings us to the industry benchmarks. According to a report by Finmark, most SaaS businesses cite anything between 10% and 30% as a solid expansion MRR rate.
Then again, it’s not exactly a formal standard. A good rule of thumb is: your expansion MRR rate should be higher than your churn rate.
This is also known as Net Negative Churn (NNC) — when your expansion revenue offsets and makes up for all your lost revenue. When it does, that’s how you know that your expansion efforts are working well!
Why Is Expansion MRR Important?
In the introduction, I briefly covered why it’s important to focus on boosting your expansion revenue — it brings you a healthier bottom line and a general “happily ever after.” But that’s the strategic implication.
There are also two tactical reasons for why it’s important.
The first reason is something we already discussed: strong expansion revenue leads you to negative churn. But there is more to this than simply offsetting your momentary losses.
Expansion revenue efforts tap into the very essence of customer success. That is, guiding your customers to repeat value and building long-lasting relationships driven by customer satisfaction.
As such, focusing on your expansion revenue is a win-win scenario for you and your customers. It gives you stronger, more stable growth that is powered almost entirely by the value your customers get from your relationship.
This brings us straight to the second reason for the importance of expansion MRR is all about — it helps you grow your LTV (CLV).
To understand how, let’s take a step back. We know that the average LTV (CLV) is calculated based on your Average Returns Per User (ARPU), which itself is your total MRR for a given month divided by the total number of customers in that month.
So, if you want to increase your LTV (CLV), you’ll need to increase your MRR. The catch is: trying to increase only it by acquiring new customers is not the most efficient way. Yes, your MRR will get higher with each new customer, but so will your total number of customers.
Not to mention that acquiring new customers is also expensive. According to one recent study, it costs $1.13 to acquire an additional $1 of revenue from a new customer. And that’s where expansion revenue comes in. By comparison, each additional $1 in expansion MRR only costs $0.27 to acquire — more than four times less than via acquisition.
So, when you grow your expansion revenue, you’re not only boosting your overall MRR in a very efficient way, but you’re also growing your LTV. That, in turn, helps increase your LTV/CAC Ratio — one of the most crucial SaaS metrics which evaluates your ROI on customer acquisition.
Simply put, a stronger expansion MRR also makes it more affordable for you to acquire new customers, new customers present new opportunities for expansion, and so on — the opposite of a vicious cycle!
Tactics for Boosting Your Expansion MRR
By now, we have established what expansion MRR is and why it’s so important. So, let’s talk about a few tactics that can help you increase it:
Tracking Related Metrics
As I explained above, expansion MRR as a metric has a symbiotic relationship with other essential SaaS metrics.
That’s why you should keep track of a few additional metrics along with your expansion revenue to really get a full picture of how well your expansion is working. These include:
- Customer Acquisition Cost (CAC)
- CAC Payback Period
- Customer Lifetime Value (LTV)
- LTV/CAC Ratio
The best way to track these metrics is a comprehensive customer success platform that can bring all you data in one place — such as Custify.
Thorough Customer Segmentation
A one-size-fits-all approach does not work for expansion revenue. Ultimately, your expansion strategy will adapt from one customer to another.
That’s where you’ll need a thorough, systematic approach to customer segmentation.
Categorize your customers based on their progress, goals, purchase history, and individual preferences. Then, adjust your expansion strategy in a way that will best fit each segment.
Strong Onboarding Program
The quality of your onboarding program has a significant impact on many things, and your expansion strategy is one of them.
In fact, expansion itself really starts as early as onboarding. The earlier your customers reach their first value, and the more satisfied they get as a result, the easier it will be for you to successfully expand their accounts in the future.
Here is an example of a thorough checklist for a comprehensive onboarding process from our dedicated guide to customer onboarding:
Again, a personalized and tailored approach is key to successful expansion. That includes your pricing strategy and your special offers.
These should reflect your individual customers’ ever-evolving needs, circumstances, and preferences. To understand those, be sure to collect feedback from your customers, and make changes to your pricing as necessary.
Tracking the metrics we discussed in the first point will also help. Based on all the insights you collect, you will be able to implement ad-hoc tactics such as tiered packages or separating individual features into add-ons.
Finally, make sure it’s easy for your customers to take the initiative and upgrade their subscription package. Ideally, you want to make sure it’s a matter of no more than a few clicks — or a quick message to their CSM.
You can also incentivize your customers to upgrade their subscriptions — and spread the word about your brand — via a loyalty program. Of course, should you implement one, it should be as personalized as possible as well!
Here’s an example of a B2B SaaS loyalty program, courtesy of Mailchimp:
Why Customer Success Should Own Expansion MRR
Before we conclude, I’d like to touch upon a somewhat contested aspect of expansion and expansion MRR — their ownership.
That is, whether expansion revenue should be owned by sales or customer success.
Traditionally, it has been owned by sales, just like any other function that has anything to do with getting new revenue. However, the sentiment has been shifting. If you ask me, expansion should be owned by customer success — allow me to explain why.
The problem with sales owning expansion is that the core competency of a sales team does not apply very well to expansion. Sales professionals are trained in the outbound methods — scouting for new leads, courting them, nourishing them to conversion.
And they can be very enthusiastic about their responsibilities — whether that’s because they’re considered the “breadwinners” of the company, or because their compensation is typically pegged to their quotes.
Simply put, sales has one end — revenue, and sources of revenue, whether it’s expansion or acquisition, are just the means.
Now, that’s not to slander sales teams or anything — they truly are vital to the success of any company. The only caveat is that their dynamic, results-driven approach can often do more harm than good when it comes to expansion.
Now, you might ask: but what about customer success teams, then? Why are they more effective for expansion than sales?
That informs their approach to actually growing expansion MRR. They don’t do it with pitches and outreach. Instead, they do it by understanding the customer’s problems, and how an upsell, cross-sell, or add-on can help them solve these problems.
Such a value-driven approach to expansion MRR is, again, a win-win scenario all around:
- It’s a win for the customer, who will get extra value from your product.
- It’s a win for the organization, which will get additional revenue and a more loyal customer.
- Finally, it’s a win for the CS team, which will get more cachet and leverage with the executive team by establishing itself as a source of revenue.
Wrapping Up on Expansion MRR
If you’re looking to achieve sustainable, stable growth for your business, expansion might be the way to go.
Getting new expansion revenue is not only more cost-effective than signing new customers. It can also be very effectively handled by your customer success team, since CS teams specialize in cultivating long-term value for and from customers.
Just remember to keep track of your expansion MRR rate and other related metrics to make sure your expansion efforts are on the right track!