Monthly recurring revenue (MRR) is a crucial metric for subscription-based SaaS companies. Understanding MRR, defined as the total of all future payments made by customers who are currently subscribed, can help you grow your company and improve customer satisfaction.
Growing SaaS businesses live and die by their recurring revenue, as investors will consider it a key indicator of the company’s growth rate. As such, it needs to be monitored closely, and more importantly, measured accurately.
This guide will discuss MRR in detail, including its various components such as New MRR, Net New MRR, Churn MRR, Expansion MRR, Reactivation MRR, etc., and methods of improving it.
What Is Monthly Recurring Revenue (MRR)?
Monthly recurring revenue is a part of a business’s total income that is likely to continue on a monthly basis. MRR does not include any one-time payments like annual fees, installation charges, and setup costs.
An easy example is the revenue that Amazon Prime or Netflix generate from subscriptions and other customer contracts with a monthly cycle.
As a form of predictable revenue, MMR is drives SaaS businesses and provides insight into the overall business health. Think of it as a power plant that spurs growth for these companies.
What is The Annual Recurring Revenue (ARR)?
Some companies offer annual or multi-year deals to their subscribers, and Annual Recurring Revenue (ARR) is the annualized version of MRR.
The only difference between ARR vs. MRR is when they’re normalized within the year or month, respectively; long-term vs. short-term view. A company’s ARR provides a long-term view while MRR provides a short-term view indicating changes in business performance over time.
Monthly recurring revenue is a more insightful metric for subscription-based SaaS companies to use to measure performance and identifying ways to improve budgeting, customer retention, and product.
Why Should Businesses Track Their MRR?
MRR helps your business control and plan future growth by providing a monthly cash flow and budget forecast. You can track how much money flows in each month (New MRR) and compare that amount against expenses, or see how much profit margin is left after paying for overhead costs like software development, hosting fees, etc.
In addition, MRR gives you a clear picture of how your software business is performing, and can be used to help customer acquisition and retention. Stable or growing MRR is a sign of customer satisfaction that will lead customers to stay with your company. You may also identify ways to grow future MRR revenue by upselling existing products or services.
How to Calculate
Calculating MRR is pretty simple and straightforward. Businesses need to multiply the number of monthly subscribers by the average revenue per user (ARPU).
Number of subscribers under a monthly plan X ARPU = MRR
For example, if there are ten subscribers on a $150 monthly plan, the MRR will be 10 X $150 = $1,500.
Calculating monthly recurring revenue for an annual subscription plan involves dividing the yearly price by 12 and multiplying the result.
Different types of MRR
The MRR establishes a correlation between customers and their accounts, highlighting their subscription behavior.
Generally, increasing MRR is a good sign for the business. However, the cause of growth can vary; the business may have an increase in new customers, plan upgrades from your existing customers, or a combination of both.
A drop in monthly revenue means that customers are downgrading, canceling their subscriptions, or churning. If MRR sharply drops, this can signal an upcoming company-wide financial catastrophe.
Understanding the causes of fluctuations in monthly recurring revenue is complicated, but there are ways to identify specific factors that cause this.
When you break down the MRR into more specific MRR types, each offers distinctive insights about revenue, customer behavior, and business health.
New MRR – The new MRR is the additional revenue generated from all new subscriptions. This can be determined by multiplying the total MRR for a time period and dividing it by that same period’s total number of paying customers.
Upgrade MRR – Upgrade MRR is the total revenue generated from all customers who have upgraded to a higher level of service. This can be calculated by multiplying the number of upgrades for a time period and dividing it by that same period’s total number of paying customers.
Churn MRR – Churn MRR is the amount lost in revenue due to customer cancellations, which is calculated as (the churn rate multiplied by) average monthly recurring revenue per customer.
Expansion MRR – Expansion MRR is any increase in revenue from existing subscribers, generated through upselling, cross-selling, and add-ons. When there is positive Expansion MRR, companies know that they can retain their customers through satisfaction and loyalty. This is good news for the SaaS business bottom line as there is no Customer Acquisition Cost (CAC) involved in these sales to existing clients.
To calculate the rate of growth in expansion MRR for a month:
(Expansion MRR in the current month / Total MRR at the beginning of the month) X 100
Downgrade MRR – Downgrade MRR is the total number of subscribers that switched to lower-priced plans.
To calculate the rate of decline in downgrade MRR for a month:
(Downgrades at the end of the current period – Downgrades at the beginning of this period) X 100
Reactivation MRR – The Reactivation MRR is the total number of previously churned subscribers who reactivated their accounts in a given month.
To calculate the rate of growth in Reactivation MRR for a month:
(Reactivated subscribers at the end of this period – total reactivations) X 100
Contraction MRR – This represents the amount that the business loses from customers reducing spending (downgrades, applied discounts, and/or removing add-ons).
The rate of growth in Contraction MRR for a month is calculated by:
(Cancellations and downgrades at the end of this period) X 100
Net New MRR – This is the new revenue that a business generates by acquiring new customers and retaining old ones. It indicates how much the company’s revenue has grown or shrunk compared to the previous month.
To calculate the Net New MRR:
Net New MRR= New MRR + Expansion MRR – Churned MRR.
If the sum of your New MRR and Expansion MRR dip below the Churn MRR (a negative value), it means you lost more revenue than you gained. If the Net New MRR is positive, then that means you’ve gained revenue.
The Net MRR Growth Rate
Aside from the useful SaaS metrics mentioned above, businesses should also pay close attention to their Net Monthly Recurring Revenue Growth Rate.
A positive Net MRR Growth Rate means the business is growing monthly. On the other hand, a negative value indicates that these businesses are steadily losing revenue month after month.
To calculate your company’s net MRR growth rate: divide the sum of all your Expansion and Churn MRRs by the starting amount before you started to take into account churned customers (i.e., excluding any changes from New or Reactivated).
This number should be expressed as a percentage; if it isn’t, multiply it by 100%. The higher this figure goes up, the better business owners can feel about their prospects regarding expansion into new markets or increasing product prices because they’ll still have enough committed dollars coming through every month.
To get their Net MRR Growth Rate, SaaS companies should follow this formula:
[(Current Net MRR – Previous Net MRR) / Previous Net MRR] X 100
Say, for instance, the company’s Net MRR in October was $12,000, and its Net MRR in September was $15,000. The Net MRR Growth Rate = [($15,000-$12,000) / $12,000] X 100 = 25%
According to Redpoint Venture Capitalist, Tomasz Tunguz, an MRR growth rate of 15-20% is a pretty good target for post-Seed/pre-Series A SaaS startups.
MRR Calculation Mistakes to Avoid
The monthly recurring revenue is an essential financial metric, so it’s crucial to get the total figure right when calculating it. There are a few common mistakes that need to be avoided for MRR to always be reliable. Among these, we can include the following:
- One-time payments – The MRR calculation can be thrown off when a company receives one-time payments. For example, if the sales of an annual subscription were made on February 15th and March 16th but totaled $200, then those two transactions are considered as separate purchases rather than being added together for the monthly recurring revenue
- Non-recurring payments – Non-recurring payments can also throw off MRR calculations. For example, if you’ve received a one-time payment of $500 and this is your only sale for the month, then that will be recorded as an extra zero in the total revenue
- Deferred payments – Deferrals often lead to inaccurate monthly recurring revenues because it means customers are paying over several months rather than all at once. To solve this problem, calculate how much they should pay upfront instead of deferring their payment or selling them on credit
- Expired subscriptions – Expired subscriptions not being removed from MRR calculations will mean there’s more money coming through than was generated. To avoid making these mistakes, remove any expired subscriptions from the calculations.
- Free trials – Free trials typically lead to higher-than-expected MRR calculations because people are often registering multiple accounts. To avoid this, use a conversion rate (for example, .03%) as the assumed percentage of all free trials which will convert and pay.
- Multiple packages – If you have more than one package price for your product or service, then you need to make sure that these are being calculated separately to figure out overall revenue across different plans
- Renewals – Renewals can be tricky, especially if they’re paid upfront instead of on a monthly basis. To calculate them accurately, divide their ongoing charge total from the year against how many months those charges cover.
- Promotions – When customers are provided with a promotion code, this should be separated from the MRR and then subtracted from the monthly subscription price for the duration of the promotion.
How to Increase Monthly Recurring Revenue?
Knowing how to calculate the MRR is an essential first step. The next phase, however, is to understand how to increase the MRR. There are several strategies that companies can employ to increase the monthly recurring revenue.
Increased Efficiency and Better Budgeting – To increase your MRR, reduce costs and expenses. Doing this will increase revenue because it takes away from your income. In addition to that, you should discover potential pitfalls as soon as you start strategically planning, which will save you money, time, and effort.
Unbundling Features – The average customer uses a subset of the functionalities available to them in their current package. For that reason, it may make sense for you to experiment with splitting your product’s features into add-on services so customers can pick and choose. As long as core functions will not be removed and the product’s overall value will be maintained, your customers will not miss these features. And if they do need them, they will be willing to pay only for their use.
Changing the Price – Most marketers are fully aware that a product or service’s price is an excellent quality indicator. While a low price may attract more customers, a too low of a price might indicate to potential customers that there’s something wrong with the product. SaaS companies need to play with their prices until they find the right balance to bring in the most total MRR without increasing customer churn.
Reconsidering the Free Plan – While free plans are excellent in raising brand awareness, they do very little in MRR. Renouncing the available free program may result in losing the free customers. Although, those who have seen the value that your product has to offer will continue on the paid plan.
Focusing on Customer Retention – For subscription-based SaaS companies, there’s another way to increase MRR that doesn’t involve a price hike. Focusing on customer retention can be done through outreach emails and upsell offers after their trial period is over. This will help retain customers who might have churned from your service or product.
Continuous Product Improvement – Continuous product improvement is another option for retaining and generating MRR. By constantly improving the service or product you are offering, your customers will feel that they’re getting a better value for their money.
Conclusion
At the end of the day, metrics are just numbers. What matters is how you use those numbers to help your business grow. A SaaS business should constantly be working to improve its MRR to grow and succeed.
Strive to keep your customers happy and optimistic about your company’s future by providing incentives for their dedication and acknowledging their purchases.
Without the proper tools, keeping track and understanding any of these metrics would be impossible. Consero provides robust financial solutions that provide leaders the clarity to make highly informed decisions to grow their organization.
We offer the people, processes, and systems to power your back-office and free you from the granularity of the accounting process. Schedule a consultation to take control of your finances.
