Gaining a competitive edge takes a valuable and differentiated product, strategic pricing, and excellent operational know-how. But when you’re building a product for a highly targeted audience, sometimes those aren’t enough. Sometimes you need a scientist’s approach: form a hypothesis, test it, and measure the results to understand what a good expansion MRR rate is for your business.
SaaS companies, in particular, have access to an extensive customer database and can use metrics like the monthly recurring revenue (MRR) rate to test key metrics:
New MRR (new customers)
Reactivated MRR (people who come back to the product)
Contraction MRR (downgrades)
Churned MRR (people who leave the product)
And finally, expansion MRR (the topic of this article)
So, what is a good MRR expansion rate? Roughly 16-20%.
But arbitrary numbers without context won’t do you much good. In this article, you’ll learn what an MRR expansion rate is, how to calculate it, and the expansion growth percentages you need to know.
What’s a Good MRR Expansion Rate?
While MRR represents the monthly value of the recurring contract elements, such as the amount from your monthly subscribers or licensed seats, your MRR expansion rate is a data subset that underlines additional revenue gained from existing customers in each month. Plainly speaking, MRR expansion shows how much extra money you make from the same customers each month.
And while gaining new customers is insanely important, keeping and upselling your current customer base is downright essential.
How is MRR Expansion Calculated?
Making accurate calculations is the first step in determining a good MRR expansion rate for your company. To calculate expansion, start by determining the base MRR from your existing customers:
Monthly average revenue per unit (ARPU) x Total # of Monthly Users = Monthly Recurring Revenue
From here, finding the MRR rate is simple. Simply divide month #1 by month #2. Multiply the result by 100 and find the difference between 100 and the number. The remaining result will be the percentage of MRR expansion growth (or if the number is greater than 100, the percentage loss).
Here’s an example of an MRR rate calculation in action.
MRR Month 1: $1,000
MRR Month 2: $1,200
Formula: ($1,000/$1,200 = .8333 x 100 = 83.33 | 100 – 83.33 = 16.67%)
Expansion rate: 16.67%
Want to read more? Get the SaaS Churn Bible.
Examples of MRR Expansion
If you’re wondering how a SaaS business can expand its MRR rate, you’re not alone. Revenues don’t grow overnight (without proper planning, at least). You need a structure in place that encourages customers to expand their scope of purchase.
Here are some of the most popular methods SaaS companies use to maximize the revenue generated from their existing customer base:
Upselling
Providing a scalable SaaS solution is the golden goose of subscription revenue. The concept is simple: your customers do well, you do well. Upselling feeds this process by offering your already-successful customers bigger, better packages loaded with more features that (ideally) help them supercharge their results. More for them, more for you. Everybody wins.
Cross-Selling
Many subscription-based software companies can find additional success by offering supplementary products outside of their standard tiered pricing models. Cross-selling is offering these complimentary products for an additional fee.
Add-Ons
Offering add-ons is the cousin of cross-selling. With this strategy, SaaS companies offer add-on features (for purchase, of course) to help customers expand the capabilities of their primary package without upgrading to the next tier.
What is a Good MRR Expansion Rate?
Now that we know how to calculate MRR expansion and what services to offer, let’s talk about how you can know where your company stacks up. While MRR expansion rate varies depending on how established your business is, these are some good general benchmarks to aim for:
Premium: < 20%
This upper echelon is reserved for the cream of the crop. Only the best, most agile SaaS companies can hope to achieve lasting 20% MRR expansion rates.
Out performers: 16-20%
Sitting between 15 and 20% MRR growth is an excellent growth rate for any SaaS company. Most companies will only achieve this level for a short period before rates start to normalize.
Average Joes: 10-15%
Being average is a good thing when it comes to steady revenue expansion. Many SaaS companies will aim to generate between 10 and 15% MRR expansion growth. While this rate isn’t enough for early companies, it’s crucial to maintain these rates once established.
Lower End: > 10%
Sitting under 10% on the growth spectrum can indicate issues within a SaaS company—like customer churn. Conducting an analysis and pinpointing your company’s growth issues is essential if you find yourself in the lower end of MRR growth, especially if your business is still young. Mature companies might be able to tolerate lower expansion rates due to the low overhead.
The Difference between MRR Expansion Rate and Net MRR Growth
It’s best to approach net MRR growth as a sum of its parts—and your MRR expansion rate is one of those key parts.
MRR expansion rate is used to single out monthly increases in revenue from existing companies. In simple terms, your expansion rate tells you if existing customers are spending more.
In contrast, net MRR growth adds new MRR and MRR expansion together, then subtracts churned MRR. This formula gives companies an idea of how much additional MRR they’ve added each month once the smoke settles.
The Bottom Line
A good MRR expansion rate lies between 16-20% but can vary depending on where your company is at in its lifecycle. While setting percentage goals for expansion is necessary, testing the sales framework and stickiness of your platform is key.
Experiment with tiered packaging, add-ons, cross-sells, and anything that will encourage customers to expand their spend on your SaaS product. Calculate your MRR expansion every month (or every quarter) to see how your company is performing with existing customers and use the other MRR metrics to make informed decisions.
If you’d like to get a deeper look at your business’s subscription revenue (and just about everything else related to subscriptions and billing), dive into the most valuable insights with the Maxio BI analytics dashboard. This tool is one of the many we offer to fast-growing SaaS companies who need to bill, manage, and analyze customer data on the fly. Sign up for a free trial of Maxio to see how your business can benefit today!