What is Expansion MRR Rate?
Expansion MRR rate is a metric that indicates the rate at which a company’s expansion monthly recurring revenue (MRR) grows from month to month. Expansion MRR is a portion of the company’s monthly recurring revenue (MRR) attributable to additional revenue generated from the company’s existing customers. In other words, expansion MRR excludes any revenue that comes from new customers.
The additional revenue that contributes to the expansion MRR is usually generated by the following activities:
- Upselling: Customers purchase a more expensive version of a product. In addition, free to paid conversions are also considered in upselling.
- Cross-selling: Customers purchase additional products or services related to another existing product or service they purchase.
- Add-ons: Customers may also purchase recurring add-ons for an existing product or service.
As with many other SaaS metrics, no standard benchmark exists for the rate of MRR expansion. Generally, each company assesses its expansion MRR rate relative to its past historical performance, as well as to the industry average. Note that every company aims to increase its expansion MRR and sustain stable growth rates of the metric.
The primary reason is to achieve revenue growth from the company’s existing customer base. It is also worth mentioning that many companies use expansion MRR rate in combination with the churn rate.
How to Calculate Expansion MRR Rate?
The metric is typically calculated as a percentage change rate of the expansion MRR in the current month relative to the expansion MRR in the previous month. Mathematically, it can be calculated using the following formula:
- MRRn – Expansion MRR in the current month
- MRRn – 1 – Expansion MRR in the previous month
Note that the company’s expansion MRR is generally calculated as a sum of upgrades, free to paid conversions, and subscription reactivations in a month.
Why is Expansion MRR Rate Important?
This metric allows a company to track revenue growth from its existing customers. The additional revenue from the existing customers is vital for every company since it indicates the happiness and loyalty of the customers. Simply speaking, a high expansion rate generally indicates that a company is expanding revenue as it manages to retain its customers.
In addition, the primary benefit of the expansion MRR metric is that there are no customer acquisition costs (CAC) involved. In other words, a company does not need to incur substantial costs to earn additional revenue. Therefore, expansion MRR provides a cost-effective method of earning additional revenue.
The only caveat about the metric is that it must not be considered in isolation. Most frequently, the metric is analyzed with a combination with the churn rate or net monthly recurring revenue (MRR).
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