Expansion revenue is when customers pay you more as they get more value from your product. They might manually upgrade to the next tier or be auto-upgraded as their usage changes.

There are two basic ways to build expansion revenue into your pricing tiers.

Value Metric. A value metric is how your company measures the per-unit value of your product.

A typical value metric might be the number of users your customer brings to your product. MailChimp’s prices are based on subscriber count, so subscribers are their value metric. Salesforce’s prices are based on the number of seats, so seats are their value metric. Usage is another good value metric, like the number of recording hours for SquadCast or gigabytes used for Dropbox.

This works because the more your customers use your product (and the more value they get out of it), the higher the price they will pay.

If you design this so that the value metric is tied to your customer’s success, they will be much less resistant when moving up to the next level. They’ve increased the number of subscribers on their mailing list, hired more people for their sales team, or increased the number of podcasts they put out every month. Jumping up to the next tier means their own business is growing alongside the value they’re getting out of your product.

A quick note about seats as a value metric: Seat-based pricing is a common value metric for SaaS, but I recommend offering it only if two users from the same company see different things when they log into your product.

For example, if User A logs into the CRM and sees tickets assigned to them by User B, seat-based pricing makes sense. If both users log in and have the exact same experience, they might as well just share a login.

Feature Gating. The second way to unlock expansion revenue is by expanding the features your customers can access at higher plans. This tends to be less effective than value metrics because it’s not as intrinsically tied to the growth of your customers’ businesses.

Feature gating can be useful if you find your customers don’t necessarily experience an increase in usage as their company scales but do end up needing an expanded set of features.

Gated features can be ones that you build or integrations you have with other services. For example, if a customer wants to export their data to Tableau, you automatically know they have the budget to pay for an expensive SaaS product. It’s reasonable to assume this type of customer would see enough value to pay a premium for a Tableau integration.

In this case, choosing to pay for higher tiers still provides them with increased value linked to their own success.

Using Both. You can also combine a value metric and feature gating. I tend to encourage people who are in the early stages to start by using just one model, then refine that as they get to know their customer base and what they need. But in many cases, having per-seat pricing with two or three levels of feature access is not a bad way to go.

Be aware, though, that it can quickly get complicated when you try to use both feature gating and value metrics.