Expansion MRR: growth from existing customers

Why it matters

Expansion is the cheapest growth a subscription business has. The customer already knows the product, trusts the billing and has already paid to acquire, so each extra dollar of recurring revenue costs far less than a dollar from a new customer.

It is also what lets a business shrink its customer base and still grow revenue. When expansion is larger than the revenue lost to cancellations and downgrades, net revenue retention rises above 100%, and the existing base grows on its own.

The formula

Add together the increase in monthly recurring revenue from every customer who was already paying when the period opened and is paying more when it closes. There are four common sources: plan upgrades, additional seats, add-ons and usage that raises the bill. Revenue from brand new customers is new MRR, and revenue that comes back from a customer who had left is reactivation. Neither belongs in expansion.

Expansion MRR = upgrades + seats + add-ons + usage increases
Expansion rate = Expansion MRR / MRR at start of period

A worked example

A business starts the month with $40,000 of MRR. These numbers are made up for illustration.

The four sources add up to $4,000, which is 10.0% of starting MRR. The $6,000 the same business added from brand new customers is excluded. Had it been counted, the rate would read 25.0% and hide how much growth came from the existing base.

How to improve it

Expansion comes from giving a customer a reason and a way to spend more as they succeed with the product.

• Price on a dimension that grows with the customer, such as seats, projects or volume, so success raises the bill.
• Make upgrade moments visible: show a customer when they near a limit and what the next tier unlocks.
• Build add-ons for needs your larger customers raise repeatedly, and sell them from inside the product.
• Review accounts that stopped growing and ask what is blocking them, whether it is a missing feature, a missing champion or a missing integration.

Common mistakes

• Counting revenue from new customers as expansion. The metric exists to show growth from the base you already had.
• Counting a customer who returns after cancelling as expansion. That is reactivation and should have its own line.
• Including one time charges such as setup or training fees. Only recurring revenue is MRR, so only recurring increases are expansion.
• Forgetting to net a downgrade within the same account when you want a net figure. Report expansion and contraction separately so neither hides the other.
• Comparing the rate across months of very different starting MRR without saying what the denominator was.

Calculate it and read next

Work it out with your own figures in the MRR calculator. Then read about Net revenue retention, Revenue churn rate and Monthly recurring revenue (MRR).

• Net revenue retention: expansion measured against the revenue lost from the same customers.
• Revenue churn rate: the losses that expansion has to outrun.
• Monthly recurring revenue (MRR): the total that expansion adds to.

Frequently asked questions