It is distinct from a cross-sell, which adds a different product alongside the current one. Upselling is upward movement on the same axis: a bigger plan, more seats, a longer term, a premium tier. The legitimate version happens when the customer has outgrown their current level and the upgrade genuinely serves them — which is why the best trigger is usage data rather than a calendar reminder.
Economically it is the cheapest revenue available. There is no acquisition cost, no trust to build, and the conversion rate is many times higher than for a stranger. For a small business this is the difference between growth requiring constant new marketing and growth compounding from the base you already have. It also reduces effective churn, because an upgraded customer is typically more embedded. The failure mode is pushing an upgrade the customer does not need, which trades a small immediate gain for the trust that made the relationship durable.
A concrete example: your plan includes three user seats for $60 a month; the next tier is ten seats for $140. A customer has been at their seat limit for two months and has twice asked support how to share access. Rather than a generic upgrade email, you note the specific pattern, explain what the larger tier removes, and offer to move them mid-cycle with a prorated charge. They accept. That is $80 of extra MRR that cost one message, against roughly $300 to acquire a new customer worth less.