As one of the most important key performance indicators for SaaS companies, is the monthly recurring revenue (MMR) which represents the revenue that can be expected continuously every month.
But before we can go any further, we need to define some basic terms. These include:
- Revenue: This represents the income a company earns in return for the goods and services they provide to their existing customer base.
- Recurring Revenue: This refers to the income that an organization can expect to earn regularly. Recurring revenue is measured monthly (the monthly recurring revenue – MRR) or annually (the annual recurring revenue – ARR).
When it comes to many SaaS organizations, they tend to calculate both the monthly and the annual recurring revenue. This tends to help them get a more comprehensive, long-term view of the company’s financial standing and a more in-the-moment one.
While these two SaaS metrics go together to determine a company’s financial well-being, subscription-based organizations that only offer annual contracts will tend to use only the ARR. On the other hand, a subscription business that provides their customers with the option of canceling their subscription before the end of the year and small and medium-sized enterprises (SMEs) will typically use the MRR over the ARR. But how does the MRR work in practice?
How To Calculate Monthly Recurring Revenue
The MRR formula is pretty straightforward.
Average Revenue Per Account (ARPA) X Total Accounts in Current Month = MRR
The Average Revenue Per Account is a pretty important MRR metric as it helps with calculating the company’s MRR. The ARPA can be determined by taking the average sum that customers are spending and dividing it by the total number of monthly customers.
To determine the MRR, you multiply that number by the total number of clients. Once the MRR figure has been calculated for each customer, the total MRR for the business can also be determined. As such, if an organization has, say, 100 customers paying, on average, $100 per month, the company’s MRR will be 100 X $100= $10,000.
That said, there are a few additional ways of calculating the monthly recurring revenue. Each additional MRR formula will depend on the metrics that want to be taken into consideration and the purpose of their intended use.
A slight variation from the formula above is the customer-by-customer method. This formula is typically employed whenever the sum paid by customers is typically the same. Therefore, if you have 100 customers that each paid $15 per month, the MRR will be 100 X $15 = $1,500.
If there are also 50 customers that each pay $25 per month, their MRR is 50 X $25 = $1,250. The total MRR for all 150 customers will be $2,750. While the customer-by-customer method tends to be less efficient than the ARPA method above, both equations are still the same.
New MRR Formula
The New MRR is the monthly recurring revenue that’s produced from new customers. Pretty much the rest of the formula is the same as above.
Expansion MRR Formula
This number stands for the additional MRR from existing customers. The Expansion MRR is seen as an upgrade, which can result from an upsell or cross-sell. The figure represents the expansion revenue over the basic MRR.
Churn MRR Formula
This calculation determines the revenue lost due to subscription cancellations. The formula is: Lost Revenue / Total Revenue X 100
As such, if you start the month with $10,000 in revenue but have lost $1,000 due to churn, the churn rate will be 10%.
Net MRR Formula
This figure is determined by using the three MRR figures above. The New MRR formula:
Net MRR = New MRR + Expansion MRR – Churned MRR
This metric tells you how much net MRR the company is gaining or losing. If the sum of the New and Expansion MRRs is higher than the Churned MRR, then the company earned more. If, however, the MRR churn is higher, the company loses money.
Reactivation MRR Formula
When a customer cancels their subscription but will return at some point in the future, the formula is pretty straightforward. If, for example, ten customers returned to your business and each purchased a $50 subscription, the Reactivation MRR will be $500.
These calculations help provide a baseline to help organizations understand their sustainability, measure business growth, and help decide on their short- and long-term goals. They will, however, need to be mixed with other metrics such as the customer lifetime value, customer acquisition cost, or customer retention rates, among others, for a comprehensive view.
Committed MRR Formula
The Committed MRR (CMRR) takes things a step further and combines the MRR with new bookings, churn, and downgrades and/or upgrades. Elements such as additional fees and one-time installation costs are typically excluded from CMRR calculations.
Suffice to say, this metric provides a more accurate and predictable revenue than MRR. This is what banks, angel investors, and venture capitalists want to see when investing in a new SaaS startup. The CMRR is also used by board members and other stakeholders when measuring and monitoring business progress.
While there is no standard definition for the CMRR, many organizations are using the following formula or a variation of it:
MRR + New Bookings + Churn + Downgrades + Upgrades = CMRR
The new bookings stand for the committed business where both parties have signed a contract. Downgrades and upgrades represent the negative and positive changes, respectively, to existing subscribers’ accounts.
What MRR Calculation Mistakes to Avoid
As a business-critical financial metric, the monthly recurring revenue always needs to use accurate data. Some common mistakes need to be avoided whenever calculating MRR to ensure that this is always the case.
- Non-recurring payments – Many make the mistake of adding one-time payments into their MRR calculations.
- Fees and Extra Charges – Like non-recurring payments, various fees and charges should not be included in the MRR.
- Full-value Revenue – If there was any payment received in advance, only the actual monthly figure needs to be used when calculating MRR.
- Free Trials – Non-revenue generating free trials often skew the MRR. With free trials, it’s expected that a higher than average attendance will take place. However, not all will become monthly subscribers after the trial is over. Adding these leads into the MRR will show a high customer acquisition rate one month and a higher than expected customer churn rate the next month.
- Promotions – When providing customers with a promotion, the amount of the promotion needs to be subtracted from the monthly subscription price for the duration of the promotion.
While calculating the MRR seems pretty straightforward, numerous variables can make the calculations more complex, which can often lead to errors. This can further be exacerbated if these calculations need to be done manually, not to mention the extra time it takes to do so.
Going Beyond the Numbers
While all subscription-based organizations work on recurring revenue, their pricing strategies can vary quite significantly. This is something that can add yet another layer of complexity to accurately calculating their MRR. Add to that initial calculation various promotions such as vouchers, coupons, free trials, and discounts, and what seemed simple in the beginning can quickly become quite convoluted and complex.
In addition, companies that operate in an industry that’s experiencing exponential growth will need to quickly and effectively evolve to meet these emerging market needs, otherwise risk becoming obsolete. This will usually mean quickly adding or retiring products, services, as well as pricing methodologies.
Unlike the traditional one-off sales model, where the revenue stream is primarily focused on expanding and accelerating customer acquisition, the subscription-based model relies heavily on customer retention. By delivering the quality of service and experience capable of driving long-term customer loyalty requires excellent account management, accurate and timely billing and invoicing, as well as the right tools to get the job done flawlessly.
Yet, keeping on top of all financial and accounting activities to ensure that everything is done error-free and on time takes time and effort. And it’s precisely that same time and effort that your already strained finance department already lacks. But what if the process can be streamlined?
With its in-depth insights and business intelligence, Conser Global offers everything you need to grow your recurring revenue business. Depending on what type of accounting and financial services are the most suitable for your needs, you can opt for outsourced, in-house, and back-office solutions.
We can help ensure that your executive team is implementing the best strategies to keep the company on track to achieve and even exceed its goals. Besides our experienced professionals, we also provide state-of-the-art cloud computing advanced financial management solutions that will help you achieve operational efficiency and financial clarity once and for all.