Monthly recurring revenue is the lifeblood of a SaaS company. It’s what makes it possible for startups to grow and mature into long-term success stories.
What Is MRR?
Simply put, it’s the amount of recurring revenue your customers pay you each month.
Monthly recurring revenue, also abbreviated as MRR, is a metric that tracks and reports how much monthly income your company currently receives on an ongoing basis through recurring payments.
As long as your MRR keeps climbing, you know you’re doing well, and MRR will continue growing as long as you’re retaining existing customers and recruiting new ones.
How is MRR Calculated?
MRR is a function of the number of your paying customers and their average monthly subscription fee (or annual rate).
The formula looks like this:
MRR = Number Of Paying Customers x Average Monthly Fee
Here’s an example: Say you’re taking in $1,000 each month from 100 customers. That’s $10,000 in recurring revenue. If the amount stays constant ($1,000) but you increase the number of subscribers to 200, your MRR increases to $20,000.
What is the MRR Target?
Do you know how much MRR you need to reach your annual recurring revenue for next year? All you need to know is the number 78.
To calculate your MMR, all you need to do is subtract last year’s ARR from your target ARR and divide by 78. That number will give you your MRR target for the coming year.
Let’s look at an example.
Suppose your ARR goal for next year is $500,000, and this year your ARR was $200,000. You would subtract $200,000 from $500,000 to get $300,000.
You would then divide $300,000 by 78 and get $3,846, which is your MRR target for the following year to reach your goal of an ARR of $500,000.
What Should be Included in MRR?
You should include the following items in your MRR:
- All the recurring revenue from customers, including monthly subscription fees and any other recurring charges.
- All of the upgrades and downgrades to your software packages. Upgrades will increase your MRR, while downgrades will lower your MRR.
- Any lost recurring revenue. Customers will come and go, and you need to consider any recurring revenue that is lost.
- Any discounts. If a customer has a $300/month package but instead pays a discounted rate of $200, the MRR for the customer is $100, not $300.
Do You Include Discounts in MRR?
When calculating the MRR for a customer, you should take into account any discounted rates, as well as any lost revenue.
If your product or service offers a discount to customers who pay in full upfront, that amount should still be included in the calculation of monthly recurring revenue. For example, let’s say your service is $30 a month, for a total of $360 per year. However, you offer a discount to your customers if they pay yearly and charge only $300 per year with this discount.
In this case, your MRR is $300/12 or $25 and not your regular non-discounted rate of $30.
The same applies if you include monthly discounts (or any other type of discount for that matter).
Why Is MRR Important?
The MRR model is a simple way to forecast your business’s future cash flow and your budget. With the time-based model that is commonly used, you can only look in the past — it does not allow for accurate prediction of what will happen in the future as any change could throw off projections completely. MRR gives you control over how much money comes into your business with better planning for growth than before.
Recurring revenue is the primary key to success for a subscription business. It allows you to plan ahead and strategize how much money will be coming in each month, quarter, or year. MRR is what keeps your company running smoothly so that it can continue scaling as needed.
MRR helps you look forward to seeing how your business will accommodate revenue growth and new market opportunities. A strong MRR is what allows you to build a strong company with lasting success.
Additionally, it helps you see quickly how well your company is doing. For example, if your MRR is going down, you know that your business is suffering financially, and you need to make some changes.
However, if you see that your MRR steadily increases month after month, you know your model is working, and your business is healthy.
How is Net New MRR Calculated?
If you want to get an accurate picture of your company’s financial health, look at the Net MRR.
Net MRR takes your total MRR minus anything that would subtract from that amount.
To calculate your own Net MRR, you need to take the first step, which is to add up the following:
- Your current MRR
- New business MRR
- Reactivation MRR
- Expansion MRR
For the second step, add up the following amounts:
- Customer churn
- Downgrades
For your third step, subtract the total amount in step 2 from the total amount in step 1.
Do this for this month and at least last month. If you have the numbers, I’d recommend you do it for the past 12 months so that you can see a longer trend of your Net MRR.
As long as your Net MRR increases month by month, it means that your company is growing.
If you see a decrease in Net MRR from month to month, then it could mean a couple of things:
You have way more churn than expected and need to build better customer relationships and marketing strategies to bring customers back.
You are spending too much money upfront for customers and not making enough recurring revenue to make up for it. This is common if you are trying to attract new customers as the upfront cost can be huge before they sign up for their first payment subscription or recurring charge.
The good news about this is that many businesses will break even after three months, so if you stay committed, things should get better. However, if your company is still having a rough time after the first three months, you may need to review your pricing structure and find other ways to get recurring revenue.