Monthly Recurring Revenue, a key business metric for SaaS businesses
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.
Before we dive into the article, have a look at this guide we've worked on with Chargebee! Their team has produced a report on the state of the subscription management industry in 2023. If you're looking for growth strategies, starting with customer retention and pricing, this guide is a must-have!
2023 State of Subscription Industry Report How subscription leaders are investing, winning, and growing customers in the Retention Era, by Chargebee
Download the ReportWhat is Monthly Recurring Revenue?
Monthly Recurring Revenue: Definition
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:
- the number of customers with a subscription,
- the different plans and prices you offer,
- your billing system.
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.
What are the benefits of using MRR?
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:
- make informed decisions,
- set realistic goals,
- appreciate the level of growth of your business,
- gather arguments to convince investors.
💡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.
List your SoftwareHow to calculate MRR?
Items to include and exclude
When calculating monthly recurring revenue, you must include :
- all recurring revenue from customers (this includes monthly subscription fees and any additional recurring fees for additional services)
- upgrades and downgrades
- customer churn
- discounts
On the other hand, you must exclude:
- non-recurring revenues (such as installation fees, options subscribed for a limited period, etc.)
- free trial subscriptions
- expenses
The easy way to calculate MRR
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.
The more advanced way to calculate MRR
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:
- the New MRR: the additional monthly recurring income earned by your new clients acquired over the course of a month;
- Expansion MRR: the additional monthly recurring income generated by your existing clients, who have upgraded to a larger and more expensive offer or have subscribed to additional options;
- MRR Reactivation: revenue from reactivating subscriptions or upgrading from a freemium version to a paid subscription, which may be separate from or part of the MRR Expansion;
- Contraction MRR: the loss of revenue caused by customers who have chosen a downgrade or have cancelled some paid options;
- Churn rate (or attrition rate): the loss of revenue due to customers who stop subscribing.
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:
© Baremetrics
And, here is another example with a detailed view of the numbers for each of the data:
How to monitor the MRR with precision
Use a billing and subscription management tool
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.
Stripe Billing
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 :
© Chargebee
Chargebee
Associate the MRR with other indicators
To make full use of the information revealed by the MRR, you can look at other key indicators to put it into perspective :
- the Churn rate MMR: this is the ratio between the number of subscribers lost and the total number of subscribers. If it is high, it is a sign of a gap between your approach and the expectations of your customers, who are turning away from your offer. An acceptable rate should be between 2 to 5% per month.
- Customer lifetime value (CLV): this corresponds to the lifetime of your customers (average number of months of their subscription) multiplied by the average amount of a customer's subscription.
It is used to capture the value of your customers, i.e. the income they allow you to generate during their life cycle.
- Customer Acquisition Cost (CAC): closely related to CLV, it corresponds to the ratio between what you spend to acquire customers (salaries, tools, marketing and communication actions, etc.) and the actual acquisition of new customers over the same period.
- The Net Promoter Score (NPS): this is the evaluation of the probability that your customers will recommend you to their entourage, peers, etc. It can be used to improve customer satisfaction.
Reach new heights with MRR growth
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!