What Is Expansion Monthly Recurring Revenue (MRR)?
Expansion monthly recurring revenue or MRR is a metric used by SaaS companies to measure the additional monthly recurring revenue generated by existing customers in a given month.
This happens when customers upgrade to pricier and feature-rich plans (upselling) and/or buy additional products/services (cross-selling).
Why Expansion MRR Matters: All About A Good MRR Rate
The expansion MRR metric allows a SaaS company to track its revenue growth from current subscribers, indicating the viability of its products, underlining its earning potential and providing insights into customer satisfaction. A high expansion MRR rate essentially suggests a revenue boost through effective customer retention.
Dhruvil Sanghvi, founder and CEO of the SaaS logistics startup LogiNext, says that the growth in expansion MRR may vary depending on the industry, size of the customer base and additional factors such as market and economic conditions, growth drivers, unexpected roadblocks and more.
Pushing upselling and cross-selling is one way of driving MRR, but a SaaS player should not overlook another critical factor – product adaptation in sync with business requirements. If a SaaS company primarily caters to small and medium businesses which can adapt very easily to new systems, it means they may soon be ready for add-ons and upgrades, leading to MRR expansion in the short term.
But in case large enterprises form the biggest part of the customer pool, full implementation of products/services across all locations may take several years, and their requirements may undergo various changes. In such a scenario, SaaS players will do well to make product modifications (if required) based on customer feedback, bundle/unbundle packages and rework pricing strategies to ensure business continuity and MRR growth for the long term.
According to Sanghvi, a 25-30% gross MRR expansion is usually considered ‘good’, often driven by a ‘negative churn’. It is a term used in subscription businesses such as software companies, where the revenue earned from existing customers upgrading their plans or making additional purchases exceeds revenue losses due to subscription cancellations or service downgrades.
What’s The Formula To Calculate Expansion MRR & Expansion MRR Rate
Simply put,
Expansion MRR = Monthly revenue from upsells and cross-sells
Or
Total monthly revenue – Regular subscriptions & revenue from new customers = Expansion MRR rate (In percent)
For example:
To calculate the expansion MRR percentage, a company will have to first subtract the expansion MRR at the beginning of January from the expansion MRR at the end of January. The result will be divided by expansion MRR at the beginning of January and multiplied by 100 to get the Expansion MMR percentage rate.
[(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
[(3000-2000) / 2000] x100 = 50% & The expansion MRR percentage is 50
The Difference Between Expansion MRR & Net MRR
Expansion MRR records the monthly rise in revenue from existing customers, underlining their additional spending generated through upselling, cross-selling and add-on services.
On the other hand, net MRR refers to the monthly revenue from newly acquired accounts and the additional revenue from existing businesses through expansions minus the MRR drop due to subscription loss and downgrades. This allows SaaS companies to track the supplementary MRR accumulated month over month.
Five Top-Notch Strategies To Boost Expansion MRR
SaaS companies need well-thought-out plans and effective execution to encourage their customers to spend more than the bare minimum. Here is why they should adopt the following measures.
- Upsell: This encourages businesses to upgrade their plans and pay higher subscription fees for advanced features, capabilities and resources. Upselling provides additional value to customers and increases a company’s monthly recurring revenue.
- Cross-sell: Offering complementary or related products/services is another expansion strategy to boost revenue. These may include additional modules, third-party integrations, 24×7 premium support, extensive product training, access to industry reports and more. The difference between cross-selling and upselling is that one can make standalone purchases and need not upgrade to a higher subscription tier.
- Offer add-ons: Add-ons are those delectable tools and features existing customers can purchase to enhance their current packages. These are not included in a customer’s standard subscription but ensure all sorts of value-addition such as analytics and reporting, API access or workflow management. In essence, add-ons allow customers to tailor their experiences and increase the usefulness of their chosen products.
- Work on pricing & discounts: Contraction MRR, or a drop in the monthly recurring revenue, is a hard reality nowadays as businesses often cancel costly subscriptions or downgrade services to reduce expenses. To retain customers, even high-performing SaaS companies review and revise their prices, bundle and unbundle packages and offer free trials and deep discounts from time to time. This is understandable, as a high customer churn rate will eventually beat sustainability and a steady MRR expansion. But an extremely low CLTV, due to contracted MRR, will also hurt one’s bottom line.
- Strike a balance: Ideally, SaaS companies should strike a balance and work on clear-cut pricing and expansion strategies, especially the latter, as top companies generate more than 60% of the new MRR from upselling and cross-selling. Nurturing customer relationships is also critical, as this may lead to account reactivation and eventually boost expansion MRR.
- Target the growth segment: Finally, not all sectors perform equally well, and SaaS companies must be on the lookout for sustainable landscapes and businesses. Customer segmentation based on SaaS requirements, purchasing power and business size is the key here, as targeting users who are likely to upgrade can boost expansion MRR. Go for contextual promotion and customise sales and marketing that will help increase conversion rates.
