MRR expansion – an introduction
Monthly recurring revenue (MRR) expansion is how you measure the growth in MRR from existing customers. MRR expansion is sometimes referred to as MRR growth rate.
What is MRR expansion?
MRR expansion is the growth in MRR from existing customers or subscriptions. Expansion is the additional revenue you generate from existing customers through upsells, cross-sells or add-ons. If your expansion revenue exceeds your churn, you lead to a state of negative churn i.e. you generate more additional revenue from your existing customer base than you lose through churn.
Why is MRR expansion important?
MRR expansion (or growth) is important because it enables you to understand the behaviour of your existing customers and whether they value what you currently provide to them. Customers that increase their MRR indicate they value the service you’re providing. Understanding how valuable new customers could be in the future is important for strategic planning.
Revenue expansion is typically more cost-effective than acquiring a new customer or new MRR because you have an existing relationship with the customer. It may be as simple as turning on additional functionality in your product with relatively limited additional support or onboarding as they’re already a customer and know and trust your product or service.
What does MRR expansion look like?
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How do you calculate MRR expansion?
The formula to calculate MRR expansion is:
MRR expansion = MRR increase from existing customers in month 1 / MRR from existing customers in month 1
Note: It’s important to exclude MRR relating to new customers.
MRR expansion worked Example
If a company has 1,000 customers who each pay £100 per month (MRR = £100,000) and 150 customers move to a more expensive plan costing an additional £50 per month, MRR expansion would be £7,500 for the month, or MRR growth of 7.5%, calculated like this:
MRR expansion = (150 customers x £50) / £100,000 = £7,500 or 7.5%
How can you improve MRR expansion?
There are a number of levers to pull to influence MRR expansion, for example:
Upsells
Moving a customer from one price plan to a more expensive price plan, either for additional functionality or an increase in users.
Cross-sells
Selling additional or complimentary services to existing customers.
Add-ons
Selling add-on features to existing customers to expand their functionality of existing plans.
Conclusion
MRR expansion is an important metric for a SaaS or subscription business to monitor as it demonstrates both price elasticity and can significantly improve the LTV of customers. The cost of expanding existing revenue is often much easier (cost and time) than acquiring new customers. Of course, saturation of your customer base needs to be considered, so while it’s a cost-effective way to grow, it can increase your reliance on existing customers and should be only part of your revenue growth strategy.
