For any SaaS (Software as a Service) or subscription-based business, growth is almost always the main goal. The best way to get there though is to have a clear picture of what is driving growth and contraction in your business so you can make strategic and empowered decisions that will help you scale.
This is where Monthly Recurring Revenue (MRR) comes in.
In the subscription world, MRR is the blood that keeps the heart of your business pumping. It’s one of the most important metrics you can measure.
TL;DR
- MRR is a measurement used to track the health and growth of a subscription-based business along with customer behavior. It’s also a way to place a value on your customers or billing entities based on how much they are contributing to your business.
- Calculating MRR can be quite straightforward if your company offers a simple pricing strategy. However, more complex pricing strategies, flexible billing frequency, discounts, free trials, refunds, cancellations, plan upgrades, downgrades, and churn—all have an effect on accurately measuring MRR.
- Gaining a thorough understanding of MRR will help you strategize and put in place effective plans to not only increase monthly revenue but also drive growth for your SaaS business.
What Is MRR?
Simply put, MRR is the total monthly revenue coming in from all recurring subscriptions. It combines both annual and monthly subscriptions as a single measurement.
While MRR is not a GAAP (Generally Accepted Accounting Principle) measurement, it is one of the most critical metrics and KPIs (Key Performance Indicators) for SaaS and other recurring billing businesses.
There are four types of MRR you should be looking at:
- New Business MRR. This is revenue earned from new customers.
- Expansion MRR. This is new revenue from existing customers when they upgrade their subscription plans.
- Contraction MRR. This refers to revenue lost from existing customers that have downgraded their subscriptions.
- Churned MRR. This is revenue your business loses when a customer ends the relationship.
With monthly subscription plans, the MRR value assigned to each customer would be the amount of money they are paying you every month. For annual plans, you would divide the price of the plan by 12 months to calculate the MRR for these particular customers.
Let’s say your business only offers one monthly and one annual subscription plan. For customers that have purchased a $75 monthly subscription, they would be assigned an MRR value of $75. If a customer has a $900 annual subscription, they would also have a $75 MRR value. With this MRR value, if your business has a customer base of around 200, then your total MRR would be $15,000.
Why Is MRR Important for SaaS Businesses?
Unlike other reporting metrics such as sales, cash, and revenue that speak to a business’s accounting team, MRR allows non-finance people like CEOs to determine if a business is growing or declining and it helps project future earnings.
The reporting metric is a unique measurement used to track the health and growth of a subscription-based business along with customer behavior. It’s also a way to place a value on your customers or billing entities based on how much they are contributing to your business. It tells you how much these customers may contribute to your business in the long term.Without a reporting metric like MRR, it’s difficult to get a good idea of your business’s true health. Regular monthly revenue doesn’t account for annual subscriptions and customer upgrades or downgrades, which can create a false sense of growing or declining business health.
Here are a few scenarios to illustrate the challenges of tracking monthly revenue without the MRR metric:
Scenario #1
When Susan signed up for a Netflix account in January, she was thrilled to learn that the streaming service offered her a one-month free trial. After that 30-day period, Susan selected the $9 a month plan that allowed her to stream on just one single device.
By June, Susan had married and the couple decided to share one Netflix account. Now that two people would be using the account, Susan upgraded her plan and started paying $13 a month, so both she and her husband could stream on their own individual devices.
Fast-forward a few years later when Susan and her husband had a child. Susan upgraded her plan again so her 5-year-old son could watch children’s content on an iPad.
When users are constantly upgrading or downgrading their plans throughout the customer lifecycle, this gives the impression that your revenue is constantly going up and down even though you haven’t lost or gained any customers. The 4 types of MRR factors in subscription upgrades (Expansion MRR) and downgrades (Contraction MRR), can give you a better idea of the health of your business.
Scenario #2
A SaaS company offers a mixture of annual and monthly plans with various pricing levels and has around 300 recurring customers.
At the beginning of the month, they acquire a new customer, an accounting firm, that signs up for an annual plan priced at $2,400. The SaaS business also has 12 other new customers paying $200 a month for a monthly subscription plan. This means that for that particular month, their revenue from all those customers will be $4,800.
Since the accounting firm signed up for an annual plan and paid upfront, the following month, the SaaS company’s revenue would only come from the monthly subscribers. This means their revenue would drop to just $2,400, and appear as if revenue is decreasing, which is not the case.
MRR takes into account these annual subscriptions. By dividing the price of the annual subscription by 12 months, this business would be able to recognize $200 as MRR.
Scenario #3
Kate has been a customer of the same SaaS company for 5 years and has consistently renewed her $200 monthly subscription from year to year. As a gesture of appreciation to Kate for being a loyal customer, the company offers her a 25% discount on the next three months of her subscription.
That same month, the company offered a prospective customer a $200 discount as an incentive to sign up for an annual plan.
Revenue reporting doesn’t take into consideration these discounts and again, will appear as if revenue is constantly going up and down, potentially giving the impression of customer dissatisfaction.
How to Calculate MRR for Your SaaS Business
The calculation of MRR can be quite straightforward if your company offers a simple pricing strategy. The reason is that when you only offer one type of subscription and pricing option, all customers are contributing around the same amount and have equal value. In such cases:
MRR = total number of customers x average billed amount per customer
However, with more complex pricing strategies or flexible billing frequency—think mobile phone and data plans, cloud storage, etc.—there are many different facets of MRR to track. Promotional offers like discounts and free trials, refunds, and cancellations, plan upgrades, downgrades, and even churn all have an effect on your MRR.
Consider the following mistakes when calculating MRR if your business offers flexible billing or more complex pricing models.
Common Mistakes in Calculating MRR
Here’s a breakdown of the common mistakes you should avoid when you calculate MRR for your SaaS business.
Including quarterly, semi-annual, or annual contracts at full value in a single month
This is a basic mistake that can skew your reports and strategies. Keep an eye out for multi-month contracts and make sure not to apply the entire contract amount to a single month.
Instead, find the amount per month while calculating MRR. For example, if your company expects customers to pay for a full year upfront, you should only count one-twelfth of the amount each month, not the entire annual payment.
Including one-time payments
One-time payments like special fees or setup charges are sometimes erroneously incorporated into MRR. Avoid including such payments in MRR calculations as this can distort not only the monthly revenue amount but also your revenue projections.
Incorrectly accounting for non-monthly billing intervals
SaaS businesses often offer various subscription plans where customers are charged annually or quarterly. Ensure that you add only the monthly share when calculating monthly recurring revenue. Failing to adjust for non-monthly billing can lead to an inflated MRR figure and distort your revenue projections.
How to Use MRR Calculations to Grow Your SaaS Business
MRR is a useful metric that can show how well your business is doing—even to those who aren’t experts in finance. As such, MRR calculations are not just about tracking revenue, they can also guide your SaaS business toward sustainable growth.
Product-market fit compass metric
MRR can tell you how well your products or services are resonating with users. It helps to understand if your business offerings are reaching the right audience and gaining traction.
As such, MRR serves as a key indicator of product-market fit. Once you’ve found the right product-market match, MRR can help you track the growth in your customer base.
Feedback for product teams
Product and R&D teams can track MRR data to assess how product updates and improvements are being received by existing customers. It’s a great way to track customer acquisition, retention, and expansion as a result of changes to your products and services.
An advantage of tracking MRR is that product teams can use it to identify what customers like and dislike, and can use these insights to reduce churn. This is an excellent way to use MRR to ensure long-term revenue growth.
Insights for sales teams
Your sales team can leverage MRR to focus on higher-quality leads that can support your revenue growth the most. Nurturing prospects that are more likely to stay and expand their subscriptions allows sales teams to increase MRR over time.
MRR helps you emphasize quality over quantity, and focus on long-term customer value and improving customer retention rates rather than short-term gains.
Key Metrics to Use with MRR
MRR is an essential metric to track but it’s not the only one. To get a complete picture of your business’s growth, it’s essential to track the following key metrics alongside MRR.
- Annual recurring revenue (ARR) – ARR is the yearly equivalent of MRR, calculated by multiplying your monthly recurring revenue by 12. It’s a valuable metric for assessing the long-term stability and growth of your business. It is especially useful when evaluating the value of long-term contracts.
- Net New MRR – Net New MRR tracks the change in MRR month-over-month. It allows you to gauge expansions, contractions, churn, and customer growth. Net New MRR tells you if your business is growing and if your customer retention and upselling efforts are paying off.
MRR Optimization Strategies
Now that you know how to calculate MRR and avoid the common mistakes in calculation, let’s look at ways to optimize it for your SaaS business growth.
Reinforce your value
Customer churn can impact your MRR. One of the best ways to reduce churn is to consistently deliver value to your customers. You need to stay ahead of your competitors and understand what features and services are appreciated by customers the most.
Tracking MRR data can help your teams understand this, and you can use it to inform product strategies and rollouts. Understand customer needs, provide excellent customer support, and continuously improve your product to ensure long-term loyalty.
Get your pricing strategy right
Setting the right price and creating profitable subscription plans can be challenging. It’s a good idea to experiment a bit before you find the right balance between profitability and affordability.
Be open to adjust your pricing based on customer feedback and market trends since the price of your products and services directly impacts MRR.
Make it easy for customers to scale their usage and spend
SaaS customers don’t want to spend a lot of time figuring things out. If they are unable to quickly upgrade to the features they want from your product, they’ll jump ship to a company that offers seamless upgrades.
Allowing customers to easily upgrade, add features, or expand their usage can boost MRR. Simplify the process and offer comprehensive customer support, which will increase revenue in the long run.
What MRR Doesn’t Measure
It’s good to track MRR, especially for SaaS businesses and those that rely heavily on subscription-based modes. However, it is also crucial to keep in mind that it doesn’t capture everything about your business’s financial health and can lead to misinterpretations if used incorrectly. For example:
- Accounting revenue – MRR measures the revenue you expect to receive each month. On the other hand, accounting revenue adheres to standardized rules and calculates income over time, not just when payments are received.
- Leads and trials – MRR calculations exclude non-paying customers, such as leads and those enjoying service trials. Once they become paying customers, they will contribute to MRR. However, information about leads and trials is important as efforts to convert them results in growth.
How to Project Monthly Recurring Revenue
To project your MRR manually, you can analyze your business’s average revenue growth rate and revenue churn. Once you have this data, plug it into the formula that accounts for both the growth and loss of customers over time.
This gives you a clearer view of how your MRR will evolve. Alternatively, you can use forecasting tools like Baremetrics, that simplify the process. These tools automatically track your MRR, helping you project future revenue, calculate cash flow, and assess customer changes.
Unlocking Growth and Scale with Stax Bill
For subscription businesses, in any given month, new customers will always be signing up and existing customers will upgrade, downgrade, or potentially even take their business elsewhere. As a result, your MRR will be under constant upward and downward pressure, so it’s important to track this metric to recognize the source of these changes.
Gaining a thorough understanding of MRR can help you strategize and put in place effective plans to not only increase monthly revenue but also drive growth for your SaaS business. If you are able to track the various fluctuations, trends, and patterns of MRR, you can pinpoint the sources of change and optimize your strategies.
A complete recurring billing and subscription management platform like Stax Bill offers detailed MRR reports, including data on new, expansion, contraction, and churned MRR. With the MRR momentum report, you can gain insights into customer behavior, monitor trends, and make data-driven decisions. This visibility helps SaaS businesses adapt, reduce churn, and implement effective changes to boost long-term success.
