MRR (Monthly Recurring Revenue)
The MRR, or monthly recurring revenue, is a sales metric that describes how much predictable revenue you can expect to make each month.
Traditional businesses can describe their growth and success in terms of the number of products sold. It’s a figure that easily translates to revenue, and businesses can quickly identify the ebb and flow of sales throughout the months. However, SaaS companies get the bulk of their revenue from subscriptions, not individual units sold. As a result, the more appropriate metric to track is MRR, or Monthly Recurring Revenue, which can track how much these subscriptions make on a recurring basis.
This article defines Monthly Recurring Revenue and the various ways that one may use to calculate it.
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What is MRR?
MRR is the amount of money that a business predictably receives at the end of each month from customers who issue recurring payments. Monthly Recurring Revenue doesn’t take into account one-off purchases and only describes the revenue stream from subscriptions and other regular payments.
How Do You Calculate MRR?
There are several methods that allow you to calculate MRR.
The simplest is based on the average revenue per user:
- First, sum up all of your subscribers’ payments
- Then, average this figure to get the average payment per subscribers
- Finally, multiply your total number of subscribers by the average payment
A simple example would be a company with 10 subscribers, 5 of whom pay $100 per month, and the remaining 5 of whom pay $50 per month.
This means your average revenue per user is:
[($50 * 5 users) + ($100 * 5 users)] / 10 users = $75 per user
Multiply $75 by 10 users and you get an MRR of $750.
Calculating Monthly Recurring Revenue Over Time
You can calculate the change in Monthly Recurring Revenue over time to determine whether your business is growing. This involves looking at three types of users: New customers, upgrading customers, and lost customers.
If you calculate the Monthly Recurring Revenue from new subscribers, you get New MRR or the revenue generated by new subscribers. This figure can also be used to determine if your customer acquisition cost is worth it. If your CAC exceeds your New MRR, you are spending more on getting customers than the additional revenue that these customers are delivering. You may want to optimize or reduce your sales and marketing budget to remedy this.
Expanded MRR is the new revenue generated by existing subscribers who start paying more in a month than they did previously. This represents customers who upgrade their subscriptions. For example, a customer who upgrades their subscription from $70 per month to $140 per month adds $70 to Expanded MRR.
Churn MRR is the lost revenue due to canceled or downgraded subscriptions. For example, if you lose a customer who used to pay $100 a month, and an existing customer downgrades their subscription from $100 a month to $50 a month, then your total Churn MRR is $150.
Change in MRR
The Change in MRR reflects the growth or decline of your Monthly Recurring Revenue. You can derive this using the three metrics above:
New MRR + Expanded MRR – Churn MRR = Change in MRR
A positive Change in MRR value means that your business is growing, while a negative Change in MRR value means that your total Monthly Recurring Revenue is declining.
You can use this figure to determine if there are areas of improvement for your subscription growth, such as your value proposition or marketing efforts. It also allows you to observe trends that are related to your strategic decisions, and how effective your sales teams and marketing efforts are at helping you reach your targets.
Converting MRR to ARR
At times, you may want to forecast your yearly revenue based on your subscriptions. This involves a figure called ARR, or Annual Recurring Revenue. This will give you a long-term look at how your company is performing.
Calculating your ARR can be as simple as multiplying MRR by 12. This will provide you with a projection of your expected revenue over the next 12 months. However, this number assumes that your business will remain static throughout the year. For a more accurate result, you want to combine your Monthly Recurring Revenue with your projections for Change in MRR over the next 12 months.
What is the Importance of Monthly Recurring Revenue?
Calculating MRR gives you several data points that can help you make decisions about your SaaS business:
- It’s a Clear Measure of SaaS Performance
Tracking your Monthly Recurring Revenue will expose various trends in your SaaS product’s performance that can be acted upon immediately. Growing your MRR is key to expanding your business, so you’ll want to look at how each of your Monthly Recurring Revenue values is moving and how you can adjust to them.
- You Can Use It to Motivate Your Team
MRR can also provide you with metrics and targets for your sales team’s performance. Setting targets that involve increasing new acquisitions and reducing churn rates can help you develop sales compensation plans for your account managers.
- It Helps You Decide How to Use Your Budget
MRR represents how much money you can expect to come in each month. This allows you to set monthly expense targets against your Monthly Recurring Revenue. For example, your marketing budget or business development efforts can be calculated based on how much you expect them to improve your MRR.
Monthly Recurring Revenue: A Core Metric For Any SaaS Business
Calculating MRR is the best way for your SaaS business to track its performance. The insights you derive from it can help you make decisions about where to take your business, and how to optimize for growth and expenses over time.