Expansion rate in SaaS is an oft-overlooked metric that can uncover a lot of insights about the health of your business. While there are other common health check metrics commonly used by investors such as churn rate, expansion rate holds its own as a good indicator of future success, since:
- Strong customer expansion is the primary ingredient in negative churn
- It removes churn from the equation which — while important — can often cloud the overall picture
The basic formula for MRR expansion rate is as follows:
Beyond these high-level health checks that investors love to see, digging into expansion rate can actually answer more practical questions about your pricing strategy.
Here are a couple of ways you can look at expansion, beyond pure expansion rate.
Time to expansion
How long does it take for new customers to upgrade their subscription?
Time to expansion (TTE) is a measurement of the average time it takes for a customer to upgrade (expand) their subscription after signing up. When measuring the average, I’d recommend using median, which should lessen the impact of outliers (see our data literacy cheat sheet for more advice on averages). It can also be useful to only exclude customers who have never upgraded in your sample.
While this is both interesting and useful metric to analyze, you should take care when optimizing for TTE — it’s not something you should unquestionably aim to shorten.
If TTE is too short, you’ll end up with unhappy customers who feel they’re being pushed to upgrade too soon after signing up.
Average expansion size
How much do customers typically increase their subscription by?
Looking at expansion size can be useful when analyzing the friction or potential pain for your customers to upgrade. You can measure this in two ways:
- Average expansion size as a dollar increase
- Expansion size as a percentage of MRR
Measuring dollar increase is useful when looking at expansion from the perspective of your business.
Calculating expansion size as a percentage can help you understand the pain (or friction) for customers to upgrade. If you’re asking them to increase their monthly subscription payment by a significant amount (compared to what they already pay), they may think twice about the upgrade and look elsewhere.
Actions from these analyses can help you make smart changes to your pricing. This could include defining more granular expansion points in your plans (more frequent, smaller upgrades) or simply smoothing out any large jumps in price that may be causing pain.
Passive vs. Active expansion
An important distinction
Be careful: Not all account expansion is equal. Depending on your billing model, the way in which your customers upgrade could differ between:
- Active expansion: The customer chooses to upgrade their account, usually to make use of more advanced features or roll out the software to a wider group of users.
- Passive expansion: The customer’s account expands — usually automatically — based on some scalable criteria built into the pricing. For example, the number of transactions processed or email subscribers in the system.
You can read more about these two types of account expansion in The two types of freemium.
Taking this even further
As always, high level metrics can be made more actionable through segmentation. Why not look at the metrics above on the level of each individual plan to answer questions like “which plans exhibit more healthy account expansion?”
If your business serves multiple industries, it makes sense to analyze expansion for each industry segment. There are many other ways to segment metrics according to characteristics of your business — ways that can lead to new insights and better decisions.
