How much recurring revenue did your business generate this month? It sounds like a straightforward question, but it’s surprising how many businesses don’t actually know.
This is too bad, especially because there’s a lot more to MRR than meets the eye. Having an accurate MRR model in place will not only give you a better idea of your business’s health, but can also help you forecast and plan your future growth.
Let’s take a closer look at what MRR is, why it is important, how you can calculate it, and how to break it down to understand its different layers and build better forecasts.
MRR is a measure of the amount of revenue your business generates each month from recurring subscriptions and fees. It doesn’t matter whether these income streams are paid annually, quarterly, or even weekly. MRR normalizes them across a monthly time frame in order to give you an accurate picture of your month-to-month revenue.
Why is this important? There are several good reasons:
It simplifies your revenue. Keeping track of all your various pricing plans and billing periods across your regular income streams can get complicated. MRR helps reduce this down to a single, consistent number you can track.
It is a useful measure of your current health. For SaaS businesses especially, month-to-month recurring revenue is an accurate and unvarnished window into how well your business is doing. Are you taking on regular revenue and hitting your targets? Or are you still figuring out how to build a recurring stream of revenue?
It is essential for planning. Once you know your MRR, you can get to work identifying trends, pointing out weaknesses, and leveraging areas of potential growth. This will help you put together more accurate estimates, which you can use to create more effective forecasts.
Standing alongside, but separate, from MRR is Annual Recurring Revenue (ARR), which measures your recurring revenue across an entire calendar year. Like MRR, ARR gives you visibility into your business’s health and helps you forecast – although on a longer-term scale.
Calculating your MRR is easy. Just multiply your average monthly revenue per user (ARPU) by the total number of users in a given month:
ARPU (monthly) x Total # of Users (monthly) = MRR
Using this formula, 50 customers billed $200 each month would produce an MRR of $10,000.
Let’s break down each part further:
This one is simple as long as all of your customers are billed on a monthly basis. Just add up the revenue and divide by the number of customers per month. But what happens if you have some customers who are billed quarterly? And some who are billed annually?
The first step is to normalize the revenue of all your non-monthly customers. Just divide quarterly revenues by three, and annual revenues by 12:
Individual customer quarterly revenue ÷ 3 months = Avg. monthly revenue
Individual customer annual revenue ÷ 12 months = Avg. monthly revenue
Once you’ve done this, you can proceed as normal. Add up all your monthly revenues, then divide that sum by your monthly customers.
Note: Be sure to only add revenue that is recurring. One-time payments, such as installation or consulting fees, should not be a part of your MRR.
This figure is just the number of active customers you have for a given month. It should not count any customers who are still in trial and have not yet converted. And like ARPU, it should only count customers who are paying on a recurring basis, whether that’s monthly, quarterly, or annually.
By itself, MRR is a key metric to track. But taking it apart and segmenting it is the best way to understand the underlying mechanics that affect your MRR and build better forecasts. Let’s look at some of the different ways you can do this.
New MRR refers to the recurring revenue you earned from new customers. This can be a great way to measure your performance and predict future growth. When measured against customer acquisition cost (CAC), it can also help you determine the profitability of new subscribers.
To find New MRR, just multiply the total number of new customers by the MRR per customer:
Total # of new customers x MRR per new customer = New MRR
Alternatively, if each new customer is bringing in a unique MRR, you can simply add up these different figures to get your New MRR total.
Expansion MRR counts the additional monthly recurring revenue you made from existing customers. Depending on how you earned this revenue, expansion MRR can be further subdivided:
Upsells MRR: Revenue made from upgrading customers to more expensive services and products.
Addons MRR: Revenue made from selling additional features, products, or services.
Reactivation MRR: Revenue made from any business earned from previously churned customers.
Expansion MRR can give you a window into customer loyalty and satisfaction. The higher it is, the happier your customers likely are. It’s also a good way to measure the performance of new products, services, or features.
To calculate expansion MRR, add up all the additional recurring revenue you made from existing customers within a single month:
Upsells + Addons + Reactivation Revenue = Expansion MRR
Note: Do not include New MRR.
Contraction MRR is the recurring revenue you lost within a given month from existing customers. This can also be further subdivided depending on where it comes from:
Downgrade MRR: Revenue lost from customers who moved to a less expensive plan or reduced the number of subscriptions they pay for.
Cancellations MRR: Revenue lost from customer cancellations.
To find contraction MRR, add up the revenue you lost from existing customers downgrading or canceling within a single month:
Downgrades + cancellation lost revenue = Churned MRR
This metric is another way to measure your business’s performance and identify possible points of weakness.
The best scenario is to have your churned MRR to be smaller than your expansion MRR. This means your MRR keeps growing even without new customers and your revenue churn rate is negative. In other words, your existing paying users get so much value from your product that they grow their usage – and recurring subscription – at a faster rate than they churn or downgrade.
Once you know how to subdivide MRR across different categories, you can combine them back together to get your Net New MRR. This is the monthly value of new accounts and expansions to existing counts minus the value lost from downgrades and cancellations:
New MRR + Expansion MRR - Churned MRR = Net New MRR
For example, if your business earned $1,000 in new MRR and another $1,000 from expansion MRR, but lost $500 in churned MRR, you’d have a net new MRR of $1,500.
Calculating this metric can give you a more nuanced snapshot of your monthly business performance. This will help you:
Keep track of how customer churn and/or downgrades are affecting your total MRR.
Determine whether you should invest more in customer acquisition or retention.
Forecast future MRR more accurately.
Committed MRR provides the most complete picture of your monthly revenue. While there is no one formula for calculating CMRR, a good place to start is to combine your recognized MRR with prospective revenue, such as new business bookings and new upsell bookings, along with any downgrades or churn:
MRR + New Bookings + Churn + Downgrades + Upgrades = CMRR
Revenue recognition is an accounting concept in which any revenue received must only be accounted for if the good or service has actually been delivered. This means that if a customer pays up front, you should not recognize that revenue until you have actually fulfilled the terms of your contract. Meanwhile, new business bookings and new upsell bookings generally refer to subscriptions and expansions that customers have signed and committed to in paper, but have not yet produced revenue.
Simply put, accounting for recognized revenue and bookings alongside churn and downgrades gives you a more realistic account of your MRR. Especially for SaaS companies, investors and banks will want to have a full portrait of your business inflow and outflow. CMRR is the best way to do this and this is what they will look at.
Like any metric, you should avoid looking at your MRR in isolation. Instead, what really matters is how MRR, as well as its underlying components, evolves over time.
This can tell you whether your business is on the right trajectory by measuring your MRR growth rate and helps you forecast other valuable metrics.
What is the growth stage of my company? Is my MRR growing at a healthy pace?
Does my MRR growth rate reflect additional investments, such as marketing and advertising?
How do my MRR growth rates change across different channels? Across different client profiles?
When will we be profitable if we project our MRR growth? How different MRR growth levels would impact your burn rate?
Ultimately, it is up to you and your business specificities to draw the best insights from tracking your MRR and its components. Just remember: the more you segment your data, the better insights you will get and the more accurate your MRR forecasts will be.
Monthly Recurring Revenue (MRR) is a financial metric that quantifies the predictable revenue generated by a SaaS business from its subscription-based products or services.
MRR is important for providing cash flow visibility, predictable revenue, measuring growth, and attracting investment.
Calculate MRR by multiplying the number of active customers by the average revenue per user (ARPU).
To optimize MRR, reduce churn, increase acquisition, upsell and cross-sell, and offer annual subscription plans.