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) Cross-Sell New Products
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5) 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.
6) 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.
Frequently asked questions
What is Expansion ARR and why is it important for SaaS companies?
Expansion ARR refers to the additional annual recurring revenue generated from existing customers through upsells, cross-sells, and other strategies. It is crucial for SaaS companies as it helps improve net retention and drives growth without acquiring new customers.
How can upselling more seats increase Expansion ARR?
Companies using a subscription pricing model can increase Expansion ARR by encouraging customers to purchase more seats. This strategy is effective for businesses with productivity and collaboration applications, as it expands usage across different business units and regions.
What role does usage-based pricing play in growing Expansion ARR?
Usage-based pricing models allow companies to grow Expansion ARR by encouraging customers to consume more of the product. This can involve longer usage periods, increased transaction counts, or higher volumes, commonly seen in sectors like cloud infrastructure and cybersecurity.
How do feature tier upgrades contribute to Expansion ARR?
Feature tier upgrades involve encouraging customers to move to higher-tier plans with more features. This strategy leverages the “good,” “better,” “best” model, where customers pay more for additional features, thus increasing Expansion ARR.
What are the benefits of offering professional services and premium support for Expansion ARR?
Offering professional services and premium support as part of a recurring contract can be classified as ARR. These services provide additional value to customers, encouraging them to invest more in the company’s offerings, thereby boosting Expansion ARR.
