2024 CODiE Finalist

Monthly Recurring Revenue (MRR)

What is MRR?

MRR, “Monthly Recurring Revenue,” is a critical metric used in subscription-based businesses, particularly for SaaS, telecommunications, and other subscription services. MRR represents the predictable and recurring revenue generated from customer subscriptions on a monthly basis.

Why is MRR Important for Business?

MRR is important for several reasons:

Financial Predictability: MRR provides a predictable and stable source of revenue allowing businesses to forecast their cash flow and revenue expectations for the coming months.

Business Valuation: MRR is a critical in valuing subscription-based businesses. Investors and potential buyers often use MRR as a key indicator of the company’s financial health and potential for future growth.

Performance Tracking: MRR allows businesses to track their performance and growth over time, and  comparing MRR figures from month to month or year to year provides insights into how well the business is attracting and retaining customers.

Customer Retention: Monitoring changes in MRR can reveal the impact of customer churn (cancellations) and expansion (upsells or cross-sells). Understanding these dynamics helps businesses identify areas for improvement in customer retention and expansion efforts.

Resource Allocation: MRR informs resource allocation decisions. Businesses can use MRR data to determine how much they can invest in marketing, sales, and product development while maintaining profitability.

Pricing Strategies: MRR can help with pricing strategies and decisions. By analyzing the contribution of different pricing tiers to MRR, businesses can optimize their pricing models to maximize revenue.

Growth Measurement: MRR growth is a key indicator of business health. Consistent month-over-month or year-over-year MRR growth is a sign that the business is acquiring and retaining customers effectively.

Customer Satisfaction: MRR can be an indirect measure of customer satisfaction. An increase in MRR can result from customer satisfaction and loyalty, while a decrease may indicate dissatisfaction or churn.

Investor and Stakeholder Confidence: High and growing MRR figures can make investors, stakeholders, and lenders confident. A strong MRR trend demonstrates the business’s ability to generate consistent revenue.

Cash Flow Management: MRR contributes to cash flow stability. Regular monthly revenue streams can help businesses cover their operating expenses and invest in growth initiatives without relying solely on sporadic, one-time payments.

Decision-Making: MRR data can guide strategic decisions, and businesses can use MRR insights to identify opportunities for market expansion, new product development, or changes in pricing and packaging.

Customer Lifetime Value (CLV): MRR is a component of CLV calculations. Understanding MRR helps estimate the long-term value of a customer to the business.

What are the Types of MRR?

MRR can be categorized as follows:

New MRR: This represents the revenue generated from new customers who have subscribed to your product or service during a specific month. This category reflects the expansion of your customer base.

Expansion MRR: This includes the additional revenue generated from existing customers due to upsells, cross-sells, or add-on purchases.

Contraction MRR: This represents the revenue loss from existing customers who have downgraded their subscription plans or removed add-ons or features. It reflects a reduction in revenue from existing customers.

Churn MRR: This is the revenue loss resulting from customer cancellations or terminations during a specific month. It reflects the revenue that is no longer being generated due to customer attrition.

Net New MRR: This is the net result of the month’s revenue changes, accounting for both revenue expansion (new MRR and expansion MRR) and revenue contraction (contraction MRR and churned MRR). It provides a comprehensive view of how your customer base is evolving.

Gross MRR: This is the total MRR before accounting for any reductions due to refunds, credits, or discounts. It represents the raw revenue generated by your subscription plans and add-ons.

Net MRR: This is the MRR after accounting for reductions such as refunds, credits, and discounts. It reflects the actual revenue received by the company.

Ending MRR: This is the total MRR at the end of a specific month. It serves as a snapshot of the current state of your recurring revenue.

Types of MRR

What is the Formula for MRR?

There are two formulas for calculating MRR, so the way it is calculated is dependent on the information you have available.

The first one is to find the sum of all your paid subscriptions.

MRR = Sum of monthly recurring charges from all customers

If the Average Revenue Per User (ARPU) is known, this formula can be used.

MRR = ARPU * Number of paying customers

Choose whichever formula makes sense for your business.

MRR Calculation: Example

To calculate MRR for a subscription-based business, you would need to find the number of paying customers you have and know how much revenue on average they are paying each month.

Total Number of Customers
Average Revenue Per User Per Month

Since we know the ARPU, we can use the second formula mentioned in the section above using the information from the above chart.

MRR = 1,000 x 400

MRR = $400,000

So, the total monthly recurring revenue for this SaaS company is $400,000. MRR is a valuable metric for tracking your subscription-based business’s revenue stability and growth.

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