Monthly recurring revenue, or MRR, is an important financial metric in the SaaS business model.
Predictable monthly revenue from subscription customers makes it easier to forecast the future and make informed decisions about budgets, spending, and scaling. As a revenue-tracking metric, MRR is also an excellent indicator of past and present business health.
That’s not all. Thanks to its correlation with customers and their accounts, MRR offers insights into subscription behavior. A rising MRR suggests either increased customer acquisition, account upgrades, or both. A falling MRR indicates downgrades, cancellations, and churn.
To tease out the specific reasons behind rising and falling MRR, business leaders need to separate the different factors that have an impact on this metric. When they do, they’ll discover four MRR types worth tracking.
- New Business MRR
- Expansion MRR
- Contraction MRR
- Churned MRR
Each of these MRR types offers unique insights into business health, revenue, and customer behavior.
We’ll dig into each to get a better understanding of what it is, why it’s important for your business, and the actionable insights you can derive from the data.
1. New business MRR
As the name implies, new business MRR is revenue generated strictly by new customers. This is different than revenue from existing customers that expand or upgrade their accounts, which we’ll get into in a moment. For this metric, we’re just focusing on brand-new customers.
Singling out this type of MRR paints a clear picture of the value new customers are bringing—and will hopefully continue to bring—to a business.
Perhaps the newest monthly cohort of customers is comprised mostly of higher-tier subscriptions, meaning it’ll bring in a little more MRR than other cohorts. If that’s the case, it may be worth investigating what attracted these bigger-spend customers to the business.
On the other end, unusually low new business MRR may indicate trouble in the market—such as lower budgets or higher competition—or with marketing and sales strategies.
Keep an eye on new business MRR to better understand the customers coming your way and to be alerted to acquisition changes that may require attention.
2. Expansion MRR
Expansion MRR comes from existing customers that upgrade or otherwise expand their subscriptions. This type of MRR is especially exciting because it means your customers are finding value in your product or service and want or need more of it.
Customers may be experiencing personal or business success thanks in part to your subscription offerings, and that’s great news. Alternately, new features in higher tiers—or even new tiers—may be attracting customers and leading to upgrades. If this is the case, well done!
Selling to existing, satisfied customers is easier and less expensive than acquiring brand new ones. You can find some practical ways your SaaS can increase it’s expansion MRR here.
Watch expansion MRR as a gauge of customer success and satisfaction, as well as an indicator of effective retention, marketing, and sales efforts for existing customers.
3. Contraction MRR
Contraction MRR is the opposite of expansion MRR. It represents revenue lost when customers downgrade their subscriptions.
Don’t confuse this with revenue lost from subscription cancellations, which we’ll cover next. Contraction MRR doesn’t mean you’ve lost customers, just that they’re spending less and thus contributing less to overall MRR.
Some contraction MRR is normal. People’s lives and business needs change over time, and subscription adjustments to accommodate those changes are expected. As a result, SaaS businesses will always see at least a little contraction MRR.
However, an increase or sudden jump in contraction can signal trouble.
Barring widespread economic disruption (looking at you, 2020), it could mean your customers are no longer finding value in your higher-tier offerings, or that more affordable solutions to the problems these tiers solve have become available.
Keep tabs on contraction MRR for insights on customer success, the market, and the effectiveness of your products.
4. Churned MRR
The least exciting of MRR types—though arguably the most important one to keep tabs on—is churned MRR. This is revenue lost when a customer terminates their subscription. Termination may be voluntary, due to a change in perceived value or poor customer service, or it may be involuntary, as can happen with a failed payment.
Like contraction MRR, some churned MRR will always be expected as customers’ needs change. However, high levels of churn requires immediate attention. If customers are actively leaving your business in large numbers, something’s wrong.
Work quickly to identify and address any issues, whether a drop in perceived value, a failure to meet customer needs, or the emergence of a strong competitor.
Involuntary churn, fortunately, is easier to address. Failed payments can be managed with automated payment retries. A modern recurring billing system can do this in the background, automatically alerting customers after a certain number of failed retry attempts.
These communications can include links to a self-service portal where customers update their payment information and retain their subscription, ultimately preserving your revenue.
Tactics like these can cut involuntary churn in half.
Churned MRR is an unpleasant, but important metric for measuring business health and customer success. Check in on it regularly along with contraction MRR to ensure your business’s revenue isn’t trending in the wrong direction.
A past article we wrote dives into details on churn metrics.
Tracking MRR doesn’t have to be difficult
Tracking the different types of MRR shouldn’t require pulling out the calculator every month or managing a mountain of spreadsheets.
SaaS businesses that have digitally transformed their FinOps with a modern, cloud-based subscription billing platform continually have these pertinent SaaS metrics tracked for them.
These platforms serve as an accurate single source of truth for all their accounts receivables.
An adaptive billing platform also provides an easy-to-navigate dashboard and exportable reports that clearly lay out earned and lost revenue from acquisition, expansion, contraction, and churn.
And with this level of detailed insights into all types of MRR SaaS business leaders gain a more granular view of business health and success. This, in turn, leads to more informed business decisions leading to long-term growth.
FAQs about Monthly Recurring Revenue
Q: What is Monthly Recurring Revenue (MRR)?
Monthly recurring revenue, or MRR, is a financial metric prevalent in the SaaS business model. It represents the predictable monthly income from subscription-paying customers, providing scope for accurate budget forecasting, informed decision-making, and indicating business health.
Q: Why is MRR important for a SaaS business?
MRR is important for SaaS businesses because it provides insights into subscription behavior and the business’s health, revenue, and customer actions. An increasing MRR suggests higher customer acquisition or upgraded accounts, whereas a decreasing MRR indicates downgrades, cancellations, and churn.
Q: What are the four MRR types a SaaS business should track?
The four MRR types a SaaS business should track are New Business MRR, Expansion MRR, Contraction MRR, and Churned MRR.
Q: What is New Business MRR, and why is it important?
New Business MRR is revenue generated strictly by new customers. Tracking this MRR type helps to understand the value new customers are adding to the business, enabling the identification of acquisition changes that require attention.
Q: What is Expansion MRR, and how is it relevant to SaaS businesses?
Expansion MRR quantifies revenue from existing customers upgrading or expanding their subscriptions. Tracking this provides a measure of customer success and satisfaction, reflecting the effectiveness of retention, marketing, and sales strategies for existing customers.
Q: How does Contraction MRR define business health?
Contraction MRR reflects the revenue lost when customers downgrade their subscriptions, thus contributing less to the overall MRR. A sudden or consistent increase in Contraction MRR can indicate trouble, revealing customers’ decreased value perception in higher-tier offerings or the availability of more affordable solutions.
Q: What does Churned MRR indicate in a SaaS business context?
Churned MRR represents revenue lost when a customer ends their subscription. High levels of churn need immediate attention and problem rectification. This metric is important for gauging business health and customer success, offering scope for improvement measures to preserve revenue.
Q: How can SaaS businesses track different types of MRR effectively?
SaaS businesses can effectively track different MRR types by leveraging cloud-based subscription billing platforms. These platforms provide accurate SaaS metric tracking, present detailed insights about all types of MRR, and inform business decisions, leading to long-term growth.
Q: How does MRR tracking aid in FinOps digital transformation for SaaS businesses?
MRR tracking aids in the digital transformation of financial operations (FinOps) by accurately and continually tracking essential SaaS metrics via modern cloud-based subscription billing platforms. This tracking provides a comprehensive view of income and losses from various sources, supporting informed business decisions.
