Monthly recurring revenue or MRR is a key business metric that subscription-based businesses should monitor.
Why is it so important? MRR makes long-term revenue forecasts based on current recurring revenue. And, by making these forecasts, it is possible to "predict" how a business will grow and convince potential investors!
So, how do you use MRR? And, how can you make growth forecasts based on your recurring revenue streams?
If you are an entrepreneur, a growth marketer, or a marketing manager looking to assess your company's growth potential, discover what is monthly recurring revenue and how to use it.
Monthly Recurring Revenue or MRR is a key business metric for companies with a subscription-based business model.
MRR corresponds to income that businesses can count on receiving every single month, thus, a predictable revenue. It is calculated according to how many customers use your service and the price that they pay every month.
Concretely, calculating MRR makes it possible to obtain the standardized predictable income that your company can generate each month. This takes into account:
By using the MRR, you will get an average of the variables mentioned above. And, this average is a consistent figure that can easily be followed over time.
Moreover, the MRR can be used to calculate the ARR, or Annual Recurring Revenue. ARR is a similar business metric that is used to predict income on an annual basis.
If your activity can be based on other income, the MRR exclusively measures predictable and recurring elements among your existing income.
The interest here is to start from a simple calculation to precisely assess the turnover your business can generate month after month. Observing and calculating the evolution of this figure helps you:
💡When using MRR, forecasts are dependent on customer loyalty. The more your customers are loyal, the more reliable this forecast will be.
It will prove to be a key tool to tackle issues many businesses face, such as customer retention to avoid losing subscribers.
When calculating monthly recurring revenue, you must include :
On the other hand, you must exclude:
There are two methods that can be used to calculate MRR:
► The first way is to make a sum of all of the amounts received by customers paying a subscription:
MRR = sum (monthly recurring revenue from all your customers)
⏺ For example, if 50 of your customers pay $5 per month for one of your plans and 50 other clients pay $15 per month for another one, the MRR is $1,000.
► The other way is based on the ARPU (average revenue per user). To get the ARPU, you must simply multiply the average amount paid by each customer every month by the number of customers paying a subscription :
MRR = ARPU x total number of customers paying for a subscription
⏺ For example, if 100 clients pay an average of $10 per month for your offer, with the 50 clients at $5 and 50 clients at $15 from the previous case, the MMR is $1,000.
However, this calculation is not very representative because it does not take into account variations such as additional sales and unsubscriptions.
As your business grows, it is important to see what factors play a role in the evolution of your monthly recurring income, to understand its fluctuations and track its activity more accurately.
This extra step provides additional insights that help you understand how your business performs, including customer acquisition, retention, and scalability.
Here are the key factors that you should take into consideration when calculating MRR:
By breaking down the MRR into different types, you will have a better understanding of the health of your company and how it evolves over time.
How can this be translated into calculations?
The Net New MMR will correspond to all your additional revenues (new customers + customers upgraded to a higher subscription + reactivations), minus the loss of revenues (cancellations + customers downgraded to a lower subscription):
Net New MRR = (New MRR + MRR Expansion + MRR Reactivation) - (MRR Contraction + Churn)
Here is an example of a dashboard showing the evolution of the new net MRR (in grey), with each component in the Baremetrics indicator tracking tool:
And, here is another example with a detailed view of the numbers for each of the data:
Billing and subscription management software allow you to monitor and manage recurring revenues with precision.
For example, with Stripe Billing, you can manage your company's invoicing and financial statistics from a single dashboard.
For the growth portion of the MRR, new subscriptions are shown in blue, which increases the MRR, and churn, which decreases the MRR, is shown in orange.
This is also the case with Chargebee, a subscription management software designed specifically for SaaS software publishers and subscription businesses. Chargebee offers a plethora of features that can be used to manage all of your subscription features.
Moreover, its advanced dashboards provide valuable data to accurately track the evolution of all subscription data (MRR, subscriptions, churn rate, etc.), as shown in the following example :
To make full use of the information revealed by the MRR, you can look at other key indicators to put it into perspective :
It is used to capture the value of your customers, i.e. the income they allow you to generate during their life cycle.
For SaaS companies and subscription businesses, calculating and regularly monitoring monthly recurring income is vital. And, by identifying ways to increase MRR growth, it is possible to increase profits.
Seeking to increase monthly recurring income is a key strategy that you should consider, even more so than acquiring new customers. It is partly by focusing your efforts on customer retention to limit churn, and therefore customer loyalty, that you will be able to accelerate your growth.
One last tip: to take the next step, take a step back from the indicators to study the major trends. These are the ones that will reveal the actions you need to take to reach new heights!