Summary
SaaS companies can achieve significant, sustainable growth by focusing on Expansion ARR, which is revenue generated from existing customers. This crucial metric goes beyond initial sales, emphasizing the value of nurturing current relationships to boost a company’s financial health. Understanding and implementing strategies like upselling seats, increasing product usage, and leveraging feature upgrades are key to unlocking this powerful growth engine.
Key Takeaways
- Expansion ARR is generated from existing customers through various methods, making it a vital indicator of sustainable SaaS growth.
- Subscription-based models boost Expansion ARR by encouraging customers to add more users or “seats” across their organization.
- Usage-based pricing drives Expansion ARR as customers consume more of the product, whether through increased transaction counts or longer usage periods.
- Offering tiered feature packages allows SaaS companies to generate Expansion ARR by guiding customers to upgrade to higher-value plans.
- Recurring professional services and premium customer support, when structured as co-terminus contracts, also contribute directly to a company’s Expansion ARR.
1) Upsell More Seats
Companies with a “per-user per-month” pricing model, commonly referred to as subscription pricing, generate expansion ARR by encouraging customers to purchase more seats. Subscription pricing models are used by companies with productivity, collaboration, and business applications. Examples of companies with subscription-based pricing models include Zendesk, Slack, Monday.com, Salesforce, and Microsoft 365. SaaS providers that sell to large enterprise and middle market accounts often use a land and expand strategy to grow adoption across different business units, product lines, and geographic regions, which drives more seats.
2) Increase Usage
Companies with a usage-based pricing model generate expansion ARR by encouraging customers to consume more of the product. Depending on the pricing metric, consumption might entail using the SaaS product for longer periods of time, increasing transaction counts, or driving more volume through the platform. Usage-based pricing models are common in the cloud infrastructure, database, integration, and cybersecurity sectors. Examples of companies with usage-based pricing models include Amazon Web Services, Google Cloud Platform, Microsoft Azure, Snowflake, Twilio, and DataDog.
3) Feature Tier Upgrades
Another way to drive expansion ARR is by encouraging customers to upgrade to higher feature tiers. SaaS companies with both subscription and usage-based pricing typically package their offerings into multiple feature tiers. The “good,” “better,” “best” paradigm is a popular model. The lowest tier (e.g., good) is offered an attractive price point, but only includes a limited feature set (e.g. 10 of the 50 features). The middle tier (e.g., better) has a higher price point and includes a broader set of features (e.g., 25 of the 50 features). The top tier (e.g., best) has a premium price point and includes all of the features (e.g., 50 of the 50). As customers upgrade from one plan to a higher tier plan, expansion ARR is generated.
4) Professional Services
Most SaaS companies sell professional services, managed services, and premium customer support offerings. If the customer signs an annual contract and pays a recurring monthly fee for these services, they may be classified as ARR. For example, a SaaS company might sell a professional services engagement that offers 20 hours per month of tier 3 engineering team and is co-terminus with the underlying SaaS subscription. Most SaaS companies would include this type of professional services engagement in ARR.
5) Premium Customer Support
Another example is premium customer support. Many SaaS companies offer a basic level of support for no additional charge that includes online documentation and a web-based trouble ticket system. Customers that want phone or video access to live support personnel purchase a premium support package that is offered for a recurring fee and co-terminus with the associated SaaS subscription. SaaS companies can generate expansion ARR by upselling customers on premium support and professional services.
Conclusion
Ultimately, growing a SaaS business isn’t just about acquiring new customers; it’s profoundly about nurturing and expanding relationships with existing ones. By strategically implementing tactics like upselling more seats, encouraging greater product usage, facilitating feature tier upgrades, and offering recurring professional services and premium support, companies can unlock powerful and sustainable Expansion ARR. Focusing on these avenues ensures a robust and predictable revenue stream, solidifying long-term success.
Frequently asked questions
What is Expansion ARR in SaaS?
Expansion ARR is the additional recurring revenue from existing customers via upsells, cross-sells, add‑ons, seat growth, or increased usage.
How do per‑user pricing models drive Expansion ARR?
By expanding adoption across teams, business units, and regions to sell more seats, especially in collaboration and productivity apps.
How can usage-based pricing increase Expansion ARR?
Encourage higher consumption through value metrics (transactions, volume, time used) and product nudges, common in infra, data, and security.
Do feature tier upgrades count as Expansion ARR?
Yes. Moving customers from “good” to “better/best” plans with premium features increases recurring revenue at higher price points.
Can services and premium support be included in ARR?
If sold as recurring, co‑terminus contracts (e.g., monthly PS hours, premium support packages), they are typically included in ARR and drive expansion.
