The monthly recurring revenue is an important metric that every subscription-based SaaS business needs to know and properly measure on an ongoing basis. However, as its name would suggest, the Monthly Recurring Revenue (MRR) changes every month due to any new revenue earned and revenue lost due to churn. The Net MRR Growth Rate is an essential key performance indicator that tracks these variations in time.
The Net MRR Growth rate takes into consideration new revenue, expansions, downgrades, and cancellations. There are also several key factors that help ensure overall business profitability. These include the minimization of MRR churn rate, driving upgrades from existing customers, and adding new paying customers into the sales funnel. The MRR growth rate shows precisely how fast a SaaS business is growing.
How Businesses With a Good Monthly Recurring Revenue Are More Appealing to Investors
A subscription-based model can increase a company’s valuation many times over. An effective SaaS company that operates on recurring revenue tends to generate a faster revenue increase when compared to its one-time sale counterparts. Venture capitalists and private equity investors are more interested in subscription-based businesses and are more willing to invest in these models knowing the recurring revenue they’re getting.
The monthly recurring revenue growth rate is among the most critical SaaS metrics that show how quickly a company can grow its customer base by acquiring new customers, retaining existing ones, or upselling current subscribers. When analyzing MRR growth rates for investment purposes, investors will look at both short-term averages and longer-term trends over time. It is vital to understand what constitutes reasonable monthly recurring revenue growth rates before making any significant business decisions, such as pivoting your product offering or even going out of business altogether!
Moreover, the MRR indicates that a business has achieved a product-to-market fit. It has created a product or service that customers are willing to pay for on a recurring basis. There are several reasons why MRR models are appealing to investors. These include:
- Scalability – Businesses that operate under a recurring revenue model will scale in a predictable manner.
- Cash Flow – Businesses that sell products or services on an ongoing basis will have cash flow predictability, which is attractive to investors.
- Risk Mitigation – The risk for any capital invested into the business will be minimized because the company has recurring revenue streams rather than just one-off sales.
- Expense Management – With increased predictability, businesses will also be able to manage their expenses more accurately. The one-time sale model doesn’t allow for too much foresight until the quarter is over. Yet, with MRR, businesses can reduce or increase their expenses to match their revenues in almost real-time.
- Flexibility – Monthly recurring revenue means you can give your customer the flexibility to change their plan without having to renegotiate a contract. You can increase or decrease subscription speed in response to the evolving needs and avoid churn due to frustration over complicated plans.
- Visibility – Monthly recurring revenue predictions give you an idea of where your business should be after a month, allowing you to make realistic projections that span over a year.
- Durability – Thanks to monthly recurring revenue, you don’t start a month with zero. With unlimited forecasts and in-depth insights, you can use the collected information to reduce risk when making important decisions regarding new business or reducing churn rates.
The Pros and Cons of The Monthly Recurring Revenue Growth Rate
When it comes to using the Net MRR Growth Rate, businesses should consider that, while it’s a competitive metric capable of providing a reliable view into how fast the organization is growing, it can also sometimes be misleading. Companies in their early stages of development will tend to have higher MRR growth rates than mature organizations.
Companies should also keep in mind that it’s not easy to predict potential growth with a month-on-month comparison of the MRR growth rate. It’s, therefore, advisable to calculate it for more extended periods to see more comprehensive trends emerging. And as mentioned, the MRR growth rate is what investors look at to gauge the effectiveness of an organization.
How To Calculate the Net Monthly Recurring Revenue Growth Rate?
To calculate your monthly MRR growth rate, you need three pieces of data: New MRR (or Churn), Reactivation MRR, Upgrade MRR, and Contraction MRR (sometimes also referred to as Downgrade MRR).
- New MRR is the monthly recurring revenue earned from newly subscribed customers in that month.
- The Reactivation MRR is the money made from previously canceled subscriptions that are reactivated in a given month.
- Upgrade MRR is the monthly recurring revenue created when existing subscriptions are transitioned to higher-paying plans.
- The Contraction MRR is the total reduction in MRR due to downgrades and cancellations
The basic formula for the Net MRR is as follows:
(New MRR + Reactivation MRR + Upgrade MRR) – (Cancellation MRR + Downgrade MRR) = Net MRR
For monthly growth, you can calculate this every month and compare it with the previous month.
((Net MRR of Current Month – Net MRR of Last Month) / Net MRR of Last Month)*100 = Net MRR Growth Rate
Say, for instance, that you have a Net MRR in January of $1000. In February, there was $600 in New MRR, $500 in Upgrade MRR, and $300 in Reactivation MRR. However, there was also $250 in customer churn (Downgrade MRR).
In this hypothetical scenario, your February Net MRR will be (600+500+300)-250 = $1150.
The Net MRR Growth Rate = ((1150-1000)/1000)*100 = 15%
There are no definitive benchmarks for what the monthly MRR growth rate should be, so there are some guidelines that SaaS businesses in different stages of growth can keep in mind.
According to Tomasz Tunguz, a Venture Capitalist at Redpoint, an MRR growth rate of 15-20% is a pretty good target for post-Seed/pre-Series A SaaS startups to have.
Jason Lemkin (founder of SaaStr) suggests that most SaaS companies take 7-10 years to grow from $1 million ARR to over $100 million in annual recurring revenue. A 20% Month-on-Month growth is an outlier, but it’s possible. Most Saas companies have a 10%-15% Month-on-Month growth rate, though.
How To Increase The MRR Growth Rate
While customer acquisition is one obvious and straightforward way of boosting the MRR growth rate, it’s usually easier said than done. It’s not always the most effective way of increasing it either. Other ways focus more on customer retention instead of acquisition, which can produce excellent results. Among these strategies, we can include the following:
Increasing the Expansion MRR
Expansion MRR is the extra monthly recurring revenue generated month-over-month from your existing customers. It does not include new MRR acquired from new customers.
An increase in expansion revenue can contribute to MRR growth with minimal added cost, and there are a variety of ways you can increase your expansion MRR. These include:
- One strategy to increase MRR is through upsells. Upselling means encouraging customers to upgrade their current plans or switch plans to a more comprehensive one.
- Cross-sells – Cross-selling means buying additional non-core products offered by you.
- Add-ons – purchases made alongside the customer’s current subscription plan.
- When a customer on a SaaS plan cancels their subscription, the company wins them back with a discount or other incentive known as reactivation.
Lowering The Churn Rate
Customer churn rate is measured by the percentage of quarterly customers who cancel their subscriptions. When an effective customer churn mitigation strategy complements your customer acquisition strategy, it also becomes achievable to pursue monthly recurring revenue growth.
The two types of customer churn are voluntary and involuntary, each problematic in its own way.
Voluntary churn is what you often see with long-standing customers who have unsubscribed or canceled their accounts because they don’t feel that it’s needed anymore. This customer churn might happen when a business doesn’t provide an excellent value for the price.
When customers voluntarily churn, they usually:
- Pause the subscription.
- Downgrade to a lower plan.
- Cancel the subscription.
High-value customers are better approached on a personal level to understand the reason behind the cancellation, such as price sensitivity or value expectation. For example, understanding their needs may indicate you need to offer different plans in your subscription service that best fit them specifically and all of your other clients.
Involuntary customer churn occurs when your company has forced a cancellation on them by non-paying, various payment failures, card declines, or non-renewing contracts. Though you may not be directly preventing this from happening, some steps can lessen the effect that these involuntary cancellations have on your MRR growth rate. To prevent this, channels should have a reminder program and smart retries.
Test Your Value Proposition
It’s a pretty well-known fact that a product or a service’s price is a quality indicator. When it comes to product pricing, the perceived value of your product should go hand in hand with how much you charge. You can try experimenting with different pricing tiers and find what works best for your customers.
Conclusion
To summarize, the net MRR growth rate is an important metric to track the growth of your SaaS business. It depends on new MRR, expansion MRR, and contraction MRR. A Net MRR growth of 10-20% is good by industry experts. By reducing churn, increasing upsells, cross-sell, and add-on, businesses can reach their optimal monthly recurring revenue growth rate.
Conser Global can help you grow your monthly recurring revenue with various accounting and financial services, including outsourcing, in-house, or back-office solutions.
We help executives at companies meet their goals with our experienced and knowledgeable staff, as well as a suite of cloud computing financial management solutions.
