In simple terms, Expansion MRR is the amount of additional revenue coming from existing customers.
Additional revenue is generated by customers in subscription business when the following activities happen,
Upsells - moving from a free plan to a priced plan or moving from a lower-priced plan to a higher-priced plan.
Cross-sells - purchase of other additional non-core products offered by you.
Add-ons - purchasing of other recurring add-ons that are not part of the customer’s current subscription plan.
Reactivation - Reactivating a canceled subscription.
This additional revenue from existing customers indicates customer satisfaction and loyalty which is valuable in the long run as it expands the customer lifetime value (LTV). In fact, the primary benefit of Expansion MRR is that the company need not incur extra cost to earn the additional revenue. In other words, no Customer Acquisition Costs (CAC) are involved in generating Expansion MRR. Christopher Janz, co-founder & managing partner of Point Nine Angel VC says that “Most of the best later-stage SaaS companies get a significant portion of their growth from existing customers.”
Expansion MRR is an important metric to gauge whether or not your existing customers are buying more or less of your product and offerings. Calculating this on a monthly basis gives more insights into how you can improve your customer success strategy.
[(Expansion MRR at the end of the month – Expansion MRR at the beginning of the month) / Expansion MRR at the beginning of the month] x 100 = Expansion MMR percentage rate
For example, if the MRR expansion at the beginning of the month is $2000 and $3000 at the end of the month, the expansion MRR rate would be,
[(3000-2000) / 2000] * 100 = 50%
The expansion MRR percentage is 50%
An increase in the number indicates that the revenue growth from your existing customer base is a good sign. But one should not solely rely on this metric to gauge customer satisfaction because it could be misleading especially if you’re losing a lot of customers month on month.
For this reason, it is essential to keep an eye on your churn while looking at this metric.
Churn can mean two things, the number of customers you lose (customer churn) and the amount of revenue you lose (revenue churn). However negative churn is good. Your company would have a negative churn rate when current customers stay subscribed and spend more money in the current month than they did in the previous month.
Monitoring Expansion MRR will help you understand customer satisfaction better. But how can you use this to expand your business?
Understanding your customer’s needs with regard to your product features is very powerful. Regular monitoring of your customer data and listening to your users can help you experiment with new features that could solve your customer problems. This will also help you with your upselling activities and keep downgrades from customers at bay. Upselling will also help increase negative churn.
Make upgrades attractive with the help of discounts and trial periods. However, before giving away a portion of your product for free, it is better to check with your finance leaders on the health of your cash flow statement.
Ensure that the upgrades are easy and obvious. An automated upgrade process can help give the customers a good experience.
Harness customer feedback. Be proactive in marketing your higher subscription models and add-on services by highlighting the customer pain points and problems you’d be solving.