Monthly Recurring Revenue (MRR)

What is Monthly Recurring Revenue?

Monthly Recurring Revenue (MRR) is a financial metric used primarily by subscription-based businesses to gauge the total and predictable revenue they can expect to receive every month. MRR provides insights into a company’s growth, stability, and financial health by capturing the consistent revenue derived from subscribed customers. This metric is vital for businesses to forecast future revenue, assess business performance, and make informed decisions.

How to measure MRR?

Measuring Monthly Recurring Revenue (MRR) involves calculating the consistent monthly revenue generated from all active subscriptions. Here’s a step-by-step approach to measure MRR:

• Standard Subscriptions:
  • For each customer, multiply the monthly subscription cost by the number of units they’ve subscribed to. For example, if a customer subscribes to a $20 service and has 3 units, their MRR is $60.
• Different Pricing Tiers:
  • If you have various pricing tiers or packages, calculate the MRR separately for each tier and then sum them up. For example, 10 customers at a $50/month tier and 20 customers at a $100/month tier would total to ($50 x 10) + ($100 x 20) = $2500 MRR.
• Discounts and Promotions:
  • If customers are offered discounts or promotional rates, factor these into your calculations. For instance, if a $100 service is given at a 10% discount, the MRR contribution is $90.
• Upgrades/Downgrades:
  • Account for customers who have upgraded or downgraded their plans during the month. Add or subtract the difference in their previous and current plan costs.
• Churned Customers:
  • Subtract the MRR from customers who’ve canceled their subscriptions during the month.
• New Customers:
  • Add the MRR from customers who have newly subscribed during the month.
• Sum Everything Up:
  • Combine all the MRR values from steps 1-6 to get the total MRR for the month.

Remember, MRR should only include recurring revenue. One-time fees, non-recurring add-ons, or setup charges shouldn’t be included in the MRR calculation.

What does monthly recurring revenue mean?

Monthly Recurring Revenue (MRR) refers to the predictable and consistent revenue that a subscription-based business can expect to receive every month. It represents the total amount of subscription fees that customers are committed to paying on a monthly basis. MRR is a vital metric for these businesses as it provides insights into their financial stability, growth rate, and future revenue projections. It excludes one-time fees, non-recurring add-ons, or any other irregular income sources.

Different Types of MRR

Monthly Recurring Revenue (MRR) can be broken down into different types to provide a more granular understanding of a subscription-based business’s revenue streams and its growth trajectory. Here are the primary types of MRR:

• New MRR:
  • Revenue generated from new customers who have just signed up for the product or service within a specific month.
• Expansion MRR (or Upsell MRR):
  • Additional revenue generated from existing customers who have upgraded their subscription tiers or added more services/products in a given month.
• Contraction MRR (or Downgrade MRR):
  • Lost revenue from existing customers who have downgraded their subscription tiers or reduced the number of services/products they’re availing within a month.
• Churn MRR:
  • Revenue lost from customers who have completely canceled their subscriptions and stopped using the service/product.
• Reactivation MRR:
  • Revenue generated from customers who had previously churned but have come back and re-subscribed within a specific month.
• Net New MRR:
  • This is the net value of MRR in a given month, taking into account all the above types. It’s calculated as: Net New MRR = (New MRR + Expansion MRR + Reactivation MRR) - (Churn MRR + Contraction MRR)

By segmenting MRR into these types, businesses can pinpoint specific growth drivers, identify problem areas, and develop strategies to optimize their subscription models.

Why is it important to measure MRR?

Measuring Monthly Recurring Revenue (MRR) is crucial for several reasons, especially for subscription-based businesses:

1. Predictability & Forecasting:
   • MRR provides a clear view of consistent income, enabling businesses to predict future revenue and cash flow. This predictability aids in budgeting, forecasting, and planning for both short and long-term strategies.
2. Business Valuation:
   • Investors and stakeholders often use MRR as a key metric to determine the value and health of a subscription-based business. A steadily increasing MRR suggests a thriving business, which can increase its valuation.
3. Identify Growth Patterns:
   • Tracking MRR helps businesses pinpoint growth drivers. By segmenting MRR (e.g., New MRR, Expansion MRR), companies can identify which areas contribute most to growth and which areas might be lagging.
4. Monitor Churn:
   • MRR, particularly when considering Churn MRR, provides insights into how many customers are leaving the service. High churn rates can indicate dissatisfaction, prompting businesses to investigate and address potential issues.
5. Allocate Resources:
   • A clear understanding of MRR can guide businesses in resource allocation. For instance, if Expansion MRR is high, resources might be allocated to developing advanced features for existing customers.
6. Evaluate Pricing Strategies:
   • Monitoring changes in MRR can help assess the effectiveness of different pricing strategies or promotional offers, allowing businesses to optimize their pricing models.
7. Measure Customer Lifetime Value (CLTV):
   • MRR, when combined with other metrics, can help calculate the CLTV, which indicates the total revenue a business can expect from a typical customer.
8. Boost Investor Confidence:
   • Consistent or growing MRR can increase investor confidence as it demonstrates the company’s stability and potential for sustained growth.

In summary, MRR offers critical insights into a company’s financial health, customer behavior, and business strategies, making it an indispensable metric for subscription-based businesses.

Best tools to track MRR

There are several tools available in the market that are specifically designed to track MRR and other key SaaS metrics. Here are some of the best and most commonly used tools:

1. Baremetrics: A subscription analytics platform that provides insights into MRR, churn, lifetime value, and more. It integrates with various payment processors like Stripe, Braintree, and Recurly.
2. ChartMogul: A subscription data platform that offers detailed analysis of MRR, churn, cohort analysis, and more. It supports integrations with various billing systems, including Stripe, Zuora, and Chargebee.
3. ProfitWell: This tool provides free subscription financial metrics, including MRR, churn, and cohort analysis. It integrates with Stripe, Braintree, and other billing platforms.