A metric often overlooked, which is extremely important to the health and growth of a SaaS business, is expansion revenue. Most SaaS folks are fixated on the basic top-line metrics such as new business MRR revenue, and MRR revenue churn. Tucked in between these figures is a metric called Expansion Revenue.

Expansion Revenue is the additional MRR revenue earned from existing clients, with add-on upsells, or through upgrading products/packages. For example, let’s say you sign up a client in October at $50/month. In December, that client upgrades their plan and is paying $70/month. This means that the expansion revenue is $20 for December, and every month afterwards.

There are a lot of tremendous benefits of expansion revenue:

1. Happy Client Base

We all know that it’s much easier and more economical to sell to existing clients, compared to new clients. When you can consistently prove that your clients are willing to spend more, this means they are happy with your service and see value in your product. By upselling to existing clients, they get further embedded into your product’s ecosystem and makes it harder for them to churn in the future.

2. Financial Benefit

Expansion revenue is extremely profitable. With the proper communication channels to reach your existing clients, expansion revenue should have no impact on your CAC.

In this over-simplified example, you can see the net new MRR when a company doesn’t focus on expansion revenue:

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Now compare that to a company who consistently focuses on increasing expansion revenue:

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Over 12 months, you can see the company that focuses on expansion revenue, and at least matches churn MRR, sees an increase of net new MRR by $12,000, or by 11%.

3. Increased ARPU

As we can see, increasing your expansion revenue will have great benefits to your MRR. In turn, this also further helps increase your ARPU. You can see in a previous post called “SaaS Metrics For Dummies”, that increasing ARPU helps elevate your LTV, which is the amount of money a client will pay you in their lifetime. For many SaaS folks, LTV is the holy grail of SaaS metrics.

This is a very simplified example of the benefits of expansion revenue. However, as you can see, the compounding effects could be huge!