Question: What’s the difference between the business model of a construction store company and a Software-as-a-Service company offering HR analytics?
Answer: SaaS companies rely on recurring monthly revenue as opposed to one-off purchases or sales.
For subscription-based companies, monthly recurring revenue (MRR) is one of the most important SaaS metrics to measure. From predicting future revenue and cash flow, to understanding revenue growth trends and making high-level decisions, understanding how MRR works is key to successfully pulling all of this off.
In this article, we’ll look at (the different types of) MRR, how to use MRR formulas, how you can improve this important metric, and much more. Let’s get started.
- Monthly recurring revenue is simply the revenue that a SaaS company would expect to receive each month. Used in conjunction with other metrics, MRR helps with budgeting, financial forecasting, and growth decisions.
- While MRR is a relatively straightforward metric, there are a few other variations to MRR that are good for your SaaS company’s sales team to be aware of, such as New MRR, Expansion MRR, and Churn MRR.
- You can improve your MRR by upselling and cross-selling, reducing churn, and implementing effective marketing strategies.
What Is MRR?
Monthly recurring revenue is the revenue that the company would expect to receive each month. If you ran a social media analytics platform called MediaLytics and charged your users $1000 a year split into monthly payments, you’d have recurring revenue for 12 months of the year.
So if MediaLytics had 10 customers on the yearly plan, you could expect a MRR of $833 ($1000 x 10 customers / 12 months).
How to Calculate MRR
Monthly Recurring Revenue (MRR) is typically calculated by multiplying the total number of paying users by the average revenue per user (ARPU). This gives you the total expected revenue your company can expect to earn on a monthly basis from your customers.
For subscription-based businesses, this can be further simplified. If all of your customers pay the same monthly fee, you can calculate MRR by multiplying the number of customers by the monthly fee.
Here’s the general formula:
MRR = Number of Customers * Average Monthly Fee
For example, if you have 500 customers each paying $20 per month, your MRR would be 500 * $20 = $10,000.
However, it’s important to note that there are different types of MRR that you might need to calculate as well—more on this below.
Different Types of MRR (And How to Calculate Them)
While MRR is a relatively straightforward metric, there are a few other variations to MRR that are good for your SaaS company’s sales team to be aware of. They can provide extra nuance into your subscription business’s growth, helping you really understand why your MRR increased or decreased over a certain period of time.
The MRR your company generates through new customers that signed up for your product or service. If MediaLytics had 5 new customers sign up in a given month for your monthly plan at $100, you’d have a New MRR of $500 ($100 x 5 new customers).
The MRR your business earns through existing customers that upgraded their plan or have opted in for add-ons. In other words, this expands the total customer lifetime value (LTV) without any customer acquisition costs (CAC).
Expansion MRR is calculated as a percentage rate compared to the previous month. That way, you can tell if your customers are buying more or less of your products or services. If MediaLytics had $500 in Expansion MRR in June and an Expansion MRR of $1000 in July, you’d have an Expansion MRR rate of 100%.
The expansion MRR formula is as follows:
Expansion MRR = [($1000 – $500)/$500] x 100 = 100%.
MRR that your company loses because of customers canceling their subscription. While you can simply calculate the amount of revenue lost, it’s best to look at it as a percentage rate.
If MediaLytics made $5,000 in one month, but lost $700 because of contract cancellations, you’d have a Churn MRR of 14% [($700 / $5,000)] x 100.
That said, there are more detailed Churn Rate MRR calculations you can make, which factor in downgrades, upgrades, and reactivations (you can learn more about them here.)
Net New MRR
Net New MRR takes into account your revenue, downgrades, and cancellations, showing how fast your SaaS organization is growing through a more holistic view.
Here’s a sample calculation: (New MRR + Expansion MRR + Reactivation MRR) – (Churn MRR + Contraction MRR).
So if you had $5,000 of new MRR, $500 in upgrades, and $400 in reactivations, but you had a churn of $1,000 and $500 in downgrades, your Net New MRR would be $4,400.
To determine the Net New MRR growth rate, subtract the Net New MRR of the Previous Month from the Net New MRR of the Current Month, divide it by the former, and then multiply it by 100.
How To Improve Your MRR
For many SaaS companies, monthly recurring revenue is the holy grail of metrics; there’s a lot of data and insights you can discover from analyzing different types of monthly and annual recurring revenue (ARR). However, the end goal for any SaaS company is to shift the needle in their direction by increasing their MRR. Let’s look at how you can increase your MRR (besides simply increasing pricing).
Upselling and cross-selling
First, let’s delineate between the two: cross-selling is when you sell an additional product or service, while upselling is when you sell a more expensive product or service to a customer. Since it can cost up to 7 times as much to acquire a new customer than to increase your MRR from a current revenue, it’s good to try out these techniques to improve your bottom line.
The most important tip is to craft your upsell and cross-sell opportunities so they truly add value for your customers. Recognize what they need (from brand tracking, audience research, customer journeys, etc.) and offer them those products or services at an additional cost. Then, focus on higher-value clients with more budget, or target those that are already satisfied with your products—all without being too pushy.
One of the sure-fire ways to maintain predictable revenue lines is by minimizing churn. We’ve spoken in-depth about how you can reduce subscriber churn, but here’s the TL;DR version. First, stick to your ideal customer profile and provide a fantastic onboarding experience. Then, try offering longer contracts instead of monthly.
Finally, you can reduce involuntary churn with a subscription management service like Stax Bill that can automate credit card retries and updating.
Effective marketing strategies
There are a plethora of strategies you can use, and the best way to find out what works best for your organization is through trial-and-error, so it’s important to invest in your marketing team! A few suggestions include using social proof of satisfied customers, utilizing contextual in-app messaging or banners, or offering free trials. Whatever approach you go for, make sure you’re able to clearly track and report on the results of your strategies.
Using MRR To Make Strategic Business Decisions
Now, let’s look at how you can use MRR in conjunction with other metrics and aspects of your organization for maximum impact.
Budgeting and financial forecasting
MRR can be used for more than just a historical picture of your overall health: you can use it for forecasting revenue as well. For example, analyzing your financial performance can help you project your future projected income based on internal trends and industry benchmarks. You can also use your MRR, coupled with your company expenses, to confidently budget and allocate resources for marketing, business expansion, and other endeavors.
Growth, scaling, and sustainability decisions
Your MRR provides a wealth of insight that can inform the business decisions you make that’ll steer your company. (Don’t make the data analysis too granular; trend lines over a period of months are better to trust.)
From offering discounts to customers that may churn, to introducing more expensive pricing plans, to increasing your rates for certain tiers of plans, combining your MRR with other data points can help your management team make data-informed decisions to sustainably and successfully scale your company.
The Stax Bill Solution
While MRR may seem like the most straightforward SaaS metric to track, taking the time to deeply understand it can unlock a world of insights beyond just knowing how much income you’ll generate each month. By tracking various types of your MRR, you’ll be able to keep your finger on the pulse of your subscription company and make accurate future predictions.
With Stax Bill, you can take charge of your billing and subscription management process with our agile, ASC 606-compliant platform that helps you execute effective software monetization strategies in no time. Plus, we accept a wide range of payment options and integrations with leading payment gateways, and provide powerful data analytics to help you make smarter decisions for your business.
Make billing a breeze with Stax Bill. Contact us to learn more.
FAQs about MRR
Q: What is Monthly Recurring Revenue (MRR)?
MRR is the revenue a company expects to receive each month, typically through subscription services. It’s an important metric that aids in budgeting, financial forecasting, and decision-making around growth strategies.
Q: How do you calculate MRR?
The basic MRR calculation can be as simple as multiplying the total number of paying users by the average revenue per user (ARPU). Here’s how you can do it:
- Find out your number of paying customers: Count the total number of customers who are paying for your product or service in a given month.
- Determine the average revenue per user (ARPU): This is typically calculated by taking the total MRR at the end of a month and dividing it by the number of paying customers you have.
- Multiply the two: Multiply the total number of paying customers by the ARPU to get your MRR. MRR = Number of Paying Customers * ARPU
Q: What strategies can a SaaS company use to improve MRR?
Several strategies can be implemented to improve MRR. These include:
- upselling and cross-selling to current customers
- reducing churn by providing better customer experience
- implementing effective marketing strategies to attract and retain customers