Expansion is the incremental recurring revenue (ARR or MRR) from customers over and above their recurring revenue from the previous period. Expansion is an important metric as it demonstrates how well you can grow revenue from your existing customer base over time through selling additional seats, new products, or price increases at renewal. Without significant expansion revenue it’s impossible to have net negative churn (>100% Net Dollar Retention).
Expansion = the sum of (current period ARR — previous period ARR) from customers whose ARR increased in the current period
When evaluating expansion, it’s important to understand the company’s pricing model and when the expansion occurs. The holy grail for SaaS companies is organic expansion: as their customers grow they add seats, use more API calls, etc. without any sales or marketing efforts from the company. Companies can also grow via selling new products (cross-sells and up-sells) or increasing prices at renewals, which require more effort from the company and can’t be relied on indefinitely.
One edge case for calculating expansion is for new customers who sign up and expand within a single period. In this case, the recurring revenue at the time of the initial sale is booked as new sales recurring revenue, but any recurring revenue added after that is expansion. It’s therefore possible for a customer have both new sales and expansion recurring revenue in the same period.