What is monthly recurring revenue (MRR)? It might seem like a simple question, but this term can be difficult to explain.
Put simply, MRR is the amount of money that a business generates from recurring billings over the course of one month. But there’s more to it than that. To understand what monthly recurring revenue means for your business, you need to know about all of its components and how they’re measured.
In this article, we’ll discuss everything you need to know about MRR so that your business can take advantage of it!
What is MRR?
As mentioned, the monthly recurring revenue (MRR) is the amount of money that your company can be expected to bring in every month. This usually has to do with subscription costs, retainers, and other predictable purchasing habits.
The way that a company’s MRR works is relatively simple: to project out a company’s future revenues. The calculation behind it, however, can be more complicated than that.
Much more than a simple metric, MRR can function as a kind of business barometer. Growing over time, it will alert you to the fact your SaaS business is growing; shrinking, on the other hand, may denote an impending decline in future performance.
Monthly recurring revenue (MRR) is an important metric for subscription-based businesses since it compounds over time. Once MRR starts to shrink, it can be challenging to manage.
A SaaS company must track its MRR based on how many active subscriptions it has and whether those customers are renewing their subscriptions. The company should also track which receipts are close to ending and new subscribers interested in joining.
To help a SaaS company track its future finances, it can be helpful to use the MRR calculations and project out a year in advance. Some companies have predictable revenue in that they can charge customers for their services for an agreed-upon term. Other businesses are less predictable, as they must constantly monitor trends to ensure ongoing customer satisfaction and predict when things may decline. Over time, you’ll develop a better understanding of your monthly recurring revenue.
Aside from MRR itself, companies also need to pay attention to churn. This represents the number of customers coming and going in a given month. Churn should be proportional to growth for it not to affect the company’s sales performance negatively.
These stats will help the SaaS business form strategies for their business and figure out where they stand with customers.
The Difference Between Revenue and Recurring Revenue
According to Investopedia, “recurring revenue is the portion of a company’s revenue that is expected to continue in the future. Unlike one-off sales, these revenues are predictable, stable, and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty.”
So, for example, if a customer is paying $20 a month for a subscription or a service, that sum represents the monthly recurring revenue (MRR). Twenty dollars multiplied by twelve months equals $240 and represents the Annual Recurring Revenue (ARR).
What Are The Different Types of MRR?
Depending on the company’s needs, there are several different types of MRR. These different types can be used to track performance or to benchmark success.
New MRR: This is the total revenue that came in from new customers. Every new customer is someone who has never paid before and may be experiencing your service for the first time, which means they’re likely still on a trial period of some sort.
Net MRR: The net MRR refers to how much revenue has been added during this particular billing cycle versus last month’s billing cycle–the so-called “gross” number minus any lost revenue due to churns, expansions, contractions, or reactivations. So were you gross up by $100 but then rebalanced by losing $50? That would mean your net MRR was only $50, even though it appears that the company earned more.
Expansion/Upsell MRR: Also known as the Upgrade MRR, the Expansion MRR refers to the new revenue from people upgrading their service.
Churned MRR: The MRR churn represents the money lost due to churns or customers that have canceled or downgraded their service. The churn rate is the percentage of customers canceling from month to month.
Reactivation MRR: These are old accounts coming back after a period of inactivity or cancellation.
Contraction MRR: Also known as Downgrade MRR, this is when a customer downgrades their service to a lower level subscription.
The Importance of Accurate MRR Tracking
A monthly period is considered the most reasonable for tracking growth rates in a subscription-based company. Monitoring weekly and annual rates do not provide enough detailed information to assess the state of the business. Monitoring the monthly revenue is the best in-between.
In a subscription-based, recurring revenue model, the money for a given customer trickles in by small amounts every month. This differs from one-off sales, where full payment is made at the time of purchase. As such, you should measure your business performance similarly to ensure steady cash flow can be maintained monthly and build a sustainable business.
That’s where a company’s MRR is useful. It helps your business keep track of month-over-month trends and provides near-term insights on its financial performance, which help you determine how you’re progressing toward your business goals. You can also look back at the past to help set realistic future goals and use your funds to attain them.
Better Financial Forecasting
The importance of accurate monthly forecasting and planning for the future is crucial for any business. The monthly recurring revenue (MRR) provides a snapshot of your financials each month which helps plan how to guide your business towards success.
If, for instance, the company generated an $80,000 MRR in June, you can assume that it will generate a similar figure in July. You can also refine your forecasting capacity by also including the historical net MRR growth rate. If your sales increase by 5% on MoM, you can assume that the July MRR will be $84,000.
Enhanced Budgeting Capabilities
Monthly recurring revenue is an important metric for business, as it predicts what revenues will come in every month. Getting a sense of the company’s expenses will also help you anticipate future revenue and make reliable budgeting and expansion plans.
In addition to this, monthly recurring revenue projections help you determine where to focus your budget.
For example, if your MRR has increased this month, but your new MRR number is declining, it can mean that current customers are satisfied with what they get from the company and aren’t interested in changing. It also means that there isn’t enough of a monthly opportunity for new clients to be onboarded. As such, you should work more on increasing your marketing and onboarding campaigns.
Growing the MRR
There are many strategies and models intended to help SaaS companies and their MRR growth. Sales development representatives, for example, can help sign new clients, while a product-led growth strategy focuses on improving the performance of current customers. Know what you’re doing best and how you might take it up an extra notch by following these best practices:
Product-Led Growth
A successful product-led growth strategy gets your product in the hands of your customers as soon as possible and starts solving their problems immediately.
Users can immediately experience the value of freemium products and services. Providing the user with an engaging initial experience will make them more likely to use your product frequently, share it with others, and focus on premium aspects of your product, which will drive business growth.
Customer Retention
The easiest way to grow your business is to keep and maintain your current customers. Most people agree that it’s cheaper to retain an existing customer than get a new one. When it comes to increasing the monthly recurring revenue, customer retention plays an important role.
To increase your monthly recurring revenue, you need to make sure that current customers are satisfied with the service and product they’ve been receiving from your company. By retaining an existing customer, it will help keep their account active which is a crucial component of increasing the MRR.
If customers stop subscribing or renew their subscriptions to your service, there will be a negative impact on the net MRR. To successfully grow monthly recurring revenue, you need to track how customers are doing with their subscriptions and make changes as necessary.
Takeaway
The right SaaS metrics can reveal whether a business is doing well and provide insights to improve. Monthly recurring revenue MRR is one of these essential metrics for any subscription business. The monthly recurring revenue MRR is a crucial metric for small business owners, providing insights into how well your company is doing for the month and insight into potential growth avenues.
Our company’s automation and integration give you visibility on your business that manual processes can’t. Our integration with finance applications means you have a real-time, consolidated view of all aspects of your company’s financial health on demand.
