Expansion MRR is extra revenue you get from existing customers. Usually, it comes from subscription upgrades or increased usage.
Many SaaS companies focus on acquiring new customers to increase revenue growth, but this is difficult. New customers don't yet trust you or know what your product does. This means that acquiring new customers can be difficult and expensive.
Existing customers already trust you (if they don't then something is wrong), and already know how your product solves their problem. But happy or loyal customers would be more likely to buy the next level of your product. Some studies say that it is around 5 times easier to get additional revenue from existing customers than it is to get that revenue from new customers.
Upselling new features or usage limits, or cross selling different products are common ways to increase revenue from existing customers. These increases are considered expansion MRR. It is usually measured as a rate compared to your current MRR. This is called expansion mrr rate.
If your saas business never expands MRR on existing customers, then the only incentive to serve existing customers better is churn reduction. Expansion MRR also increases your average Customer Lifetime Value (LTV). A higher LTV enables you to spend more on acquiring new customers.
If you already have a lot of customers or mrr, then looking at increasing expansion mrr can be a good option. If you don't have many customers yet, then increasing expansion mrr is difficult because your target audience is very small.
Expansion MRR is just how much extra MRR you gained by selling more to existing customers. Expansion MRR is just your expansion MRR divided by your current MRR.
When someone is using your product or service they are trying to achieve a result. Your product might help them to be more productive, increase mrr (MRRLab), or something else all together.
There might be a few steps required to achieve the result. Using your product might be the first step. A really good upsell would be selling features to achieve the second step. Focussing on upsells and cross-sells allows you to serve your existing customers better.
Let's go through a couple of examples to make this concrete.
I deploy this web app on Vercel. They cover hosting continuous deployment and the CDN part. It's a really great service and I pay about $20 per month.
It's really common for web applications to get slower over time. As more features are added they get more dependencies, which means more code is shipped to the browser. The end result is a slower web application.
Vercel knows this. So they sell a "performance insights" product for an extra $50 per month. This product just records the core web vitals on your page loads and sends them to Vercel for aggregation.
Performance Insights is an excellent upsell. For developers (target audience), the problem they have after "how do I deploy my site?" is "how do I know how fast it is running?". Performance insights are there to help developers on the next step of their journey.
Vercel could offer performance insights with their base subscription, but it probably wouldn't add much. Developers looking for deployment and hosting are not thinking about performance monitoring right then and there (Vercel do make it clear that they are fast though). So adding Performance Insights to the base subscription might not make it easier to acquire new customers anyway.
Hubspot is a popular Customer Relationship Management platform. They store your customer's details and let you run things like email marketing campaigns.
Their pricing is really interesting. They have a number of sub-products, e.g. Sales Hub, that cost extra compared to the base platform.
Each subproduct is priced based on the number of marketing contacts or salespeople you have in your organisation. The number of marketing contacts and salespeople is a proxy for how much extra money customers can make by using Hubspot.
The subproducts and usage-based pricing let Hubspot upsell existing customers when they get more marketing contacts or increase their sales team, and also cross-sell them on different sub-products.
There are two main places where upsells or cross sells are made:
Let's go through each of these with examples.
Hubspot and Vercel have well-places Calls To Action (buttons) on pages to prompt customers to upgrade. Some of these upgrades come with a sense of urgency, e.g. a customer might have hit a limit, while others are teased (e.g. the Performance Insights feature of Vercel.
If you want to upsell new features, just put the feature in your application. When someone clicks to use it, prompt them to upgrade to get the new functionality. This way you don't need to update your User Interface too much to accommodate users that do and do not have the paid upgrade.
Customers will sometimes contact customer success/support when they have issues. Some of these issues might be to do with your product. While some others might not be solved by your product, but you might have an upsell that addresses the issue.
An example is Stripe. They sell fraud prevention features as an upsell to their base payment-processing functionality. When companies start processing large volumes of payments, they might need to reduce fraud in order to improve their involuntary churn rates.
If a customer contacts Stripe wondering how to reduce fraud, then they are upsold on the fraud prevention functionality.
"But shouldn't the fraud prevention be free?" - Stripe already has some fraud prevention in their base product, this will suffice most businesses on Stripe.
Charging for the additional fraud prevention features means that Stripe can afford to build these new features for the larger customers that need it. If the features were free, then it is unlikely they would be as powerful. Meaning that it would be difficult for large customers to reduce their card fraud.
It can be easier to increase MRR by selling more to existing customers, instead of trying to find new ones.
The easiest way to figure out what to sell is to answer the question "what is the next problem my customers will face?".
Charging for the extra features/functionality allows you to reinvest in this area, making the product better. If you never sell more to existing customers then your SaaS business has little incentive to continue trying to serve existing customers better.
Customers who buy an upsell will increase their Lifetime Value (LTV). Higher average LTV means that you can afford to spend more to acquire each customer.