New customer growth, along with expansions from existing customers, is one of the most obvious signs of a healthy SaaS or subscription business.
This is what makes keeping track of your Net New MRR so critical. You want to know if your business is growing and succeeding – or if it’s falling short.
Read on to have a closer look at what Net New MRR is, how to calculate it, and what else you can do with it.
Net New MRR is the measure of your business’s monthly net growth. It does this by adding the Monthly Recurring Revenue (MRR) you get from new customers and the expansion revenue you get from existing customers, then subtracting any revenue lost from churn or downgrades. In other words, it is the aggregate of three different measurements:
New MRR: The additional revenue you earned from customers you did not have in the previous month.
Expansion MRR: The additional revenue you earned from customers who upgraded or expanded their existing accounts.
Contraction MRR: The revenue you lost from customers who downgraded or canceled their accounts.
These three elements are all vital to your month-to-month revenue. Even when you are bringing in revenue from both new and existing customers each month, if your churn rate is also high, then you aren’t doing so well.
The purpose of Net New MRR is to not only show you this, but help you better predict and plan for future variations.
Although they may sound similar, there is a significant difference between Net New MRR and New MRR. Knowing which one to use comes down to what you want to focus on.
New MRR is a more straightforward metric. It is simply the measure of any additional recurring revenue earned from new customers (i.e., those customers you did not have in the previous month). This means that:
You don’t count any revenue from your current customer base.
You don’t factor in Churned or Expansion MRR.
You don’t add in setup fees or other one-time costs that are not recurring.
You don’t count anticipated revenue that has not come in yet.
New MRR is useful when you want to only focus on the revenue you’re earning from new customers. This can help give your sales and marketing teams a useful benchmark to measure their efforts against, as well as help you plan and prioritize your efforts for growth. It can also help provide context alongside other metrics. For example, by comparing New MRR against your Customer Acquisition Cost (CAC), you can better assess the effectiveness of your marketing campaigns.
New MRR is a great place to begin understanding business growth. However, it should also be understood in context. By not also accounting for revenue earned from expansions and revenue lost from churn and downgrades, New MRR may only provide a limited view of your business health. In order to get a complete picture of how well your business is doing, you need to know your Net New MRR.
When calculating Net New MRR, you’ll need to factor in New MRR along with Expansion MRR and Churned MRR. The formula will look like this:
New MRR + Expansion MRR - Churned MRR = Net New MRR
Let’s break down these different types of MRR a bit further.
Expansion MRR refers to any additional MRR earned from existing customer growth. For instance, if an existing customer decides to upgrade their plan to a more expensive version, then the price difference between the old plan and their new one will count toward your Expansion MRR. Tracking this is a great way to gain visibility into the success of your upselling and cross-selling.
Churned MRR (also called Contraction MRR) is any MRR you’ve lost from existing customers. This can come from either cancellations or downgrades. For instance, if five of your customers downgraded to less expensive plans and another five canceled their accounts outright, the difference in revenue from your last month and current month would become your Churned MRR. This would then be subtracted from the sum of your New and Expansion MRR.
If you like, you can also separate out Reactivation MRR from your New MRR. This refers to customers who have previously canceled their subscriptions but then reactivated them. Tracking this metric may give you additional insight into what features, changes, or external marketing strategies are helping to draw customers back.
Let’s start by first calculating New MRR, then building on from there.
Say you brought in five new customers, each of whom have an MRR of $100. In this case, simply multiply the number of customers by their individual MRR, giving you a New MRR of $500. This is the formula we used:
5 new customers x $100 = $500 in New MRR
That’s one part of our Net New MRR formula. Moving onto Expansion MRR, let’s say you had five existing customers who each upgraded their accounts by $200. This would give you an Expansion MRR of $1,000. Here’s that formula:
5 customer upgrades x $200 = $1,000 in Expansion MRR
Finally, during this same period, you had five customers downgrade their accounts and another five cancel completely. The five that downgraded each reduced their monthly spend by $50. The five that canceled had each been paying a monthly fee of $20. This would give you a Churn MRR of $350. Here’s that formula:
(5 customer downgrades x $50) + (5 customer cancellations x $20) = $350
So let’s put these three figures together to find our Net New MRR:
$500 in New MRR + $1,000 in Expansion MRR - $350 in Churn MRR = $1,150 in Net New MRR
We already know that Net New MRR is an important metric you should be tracking to keep tabs on your growth. But it is critical for more reasons than just this. Here is what else Net New MRR can do for us:
It helps you track real performance. Each of the individual components that make up Net New MRR provide useful insights. But taken individually, they can each obscure the others. For instance, you may be proud of your strong New MRR growth, but if your Churn MRR is even higher, then your overall performance is not going so well. By using Net New MRR to track all of these metrics together, you can get a useful, realistic picture of your business’s health.
It allows you to forecast more accurately. By tracking Net New MRR consistently, you can identify trends and patterns that help you better predict the direction your business is heading.
It is useful for budgeting. With the ability to more accurately forecast business performance in the months or quarters to come, you’ll be able to properly set aside the necessary budget you’ll need. Whether this means investing in existing customers in order to encourage additional expansions or to increase retention or setting aside revenue to bring in more new customers, Net New MRR can help you identify the areas you need to increase spending, as well as where to cut back.