Introduction
Monthly Recurring Revenue (MRR)is among the top 5 SaaS Metrics businesses use to track their revenue streams and forecast future revenue. It is essential for businesses that offer subscription-based services, such as SaaS (Software-as-a-Service) companies, where customers pay a monthly fee to access the service. This article will discuss measuring Monthly Recurring Revenue and taking actionable steps to improve it in your business.
What is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue, popularly referred to as MRR, is a financial metric. This metric is more important to companies with subscription-based revenue models for their goods and services. Simply put, it is the monthly money the company expects from customers in return for their product or service regularly.
Definition
Revenue that a company expects to receive every month from its customers.
Why is Monthly Recurring Revenue (MRR) important?
The MRR is a very simple metric, but more often than not, it’s crucial to understand a subscription-based business’s financial health at a glance. Here are some reasons:
Revenue stream measurement
MRR is a reliable way of measuring the amount of money a business can expect to earn monthly. Very helpful for businesses to forecast future revenue and plan for growth, investments, hiring, and other expected expenses.
Financial stability
MRR provides a snapshot of a company’s financial health by indicating its ability to generate income. This metric can help assess a company’s income and future growth potential and indicate the stability of the company in the market.
Sales and customer success
MRR is closely tied to customer retention, a forte of sales and customer success of a business. MRR provides insight into how many customers subscribe to a company’s services and how long they are likely to stay. It can predict or give a heads-up on customer churn or churn rate. MRR can help businesses to take proactive measures to prevent cancellations and optimize customer acquisition strategies.
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Business assessment
Very often helps to determine a company’s worth, especially to potential investors for any business that operates on a recurring revenue model. It is a valuable metric for planning and decision-making.
How do you calculate Monthly Recurring Revenue (MRR)?
There are different methods to determine the MRR, which varies depending on business models.
Steps to calculate MRR
- Determine the total number of active subscribers/customers during the month(MS)
- Determine average monthly revenue per subscriber/customer (ARPU)
- Multiply the total number of active subscribers/customers by the average monthly revenue per subscriber/customer
- One-time payments do not come under MRR
Formula
MRR= MSx ARPU
MRR = Total Monthly Recurring Revenue
ARPU= Average Revenue Per User
MS= Monthly Subscribers
Calculation
For example, let’s say you have 1000 active subscribers/customers during the month, and the average monthly revenue per subscriber/customer is $60. Your MRR would be
MRR = 1000 x $60
MRR = $60000
Therefore, your monthly MRR would be $ 60,000.
Types of MRR
There are three main types listed below
New MRR
The type of revenue generated by new customers who sign up for a subscription or service in a month is the new MRR.
Expansion MRR
The additional revenue generated from current customers who upgrade their subscription or service in a month due to upsell, cross-sell, or feature additions comes under expansion MRR.
Churned MRR
The recurring revenue lost due to customers who cancel their subscription or service during a month comes under churned MRR.
Some typical examples of companies that benefit from tracking the financial metric MRR are
- Adobe a software company that offers a subscription-based service for creative professionals.
- Netflix is a subscription-based streaming service.
- Profit.co is a SaaS company that offers cloud-based software and services.
- Peloton is a fitness company that offers a subscription-based workout platform.
- Patreon is a membership platform that allows creators to earn recurring income.
FAQs
What is MRR?
The monthly income/ revenue the company expects from customers in return for their product or service regularly.
How is MRR calculated?
Steps to calculate MRR
- Determine the total number of active subscribers/customers during the month(MS)
- Determine average monthly revenue per subscriber/customer (ARPU)
- Multiply the total number of active subscribers/customers by the average monthly revenue per subscriber/customer
- One-time payments do not come under MRR
MRR= MSx ARPU
MRR = Total Monthly Recurring Revenue
MS= Number of Monthly Subscribers
ARPU= Average Revenue Per User
What are the benefits of tracking MRR?
The business can predict revenue, improve cash flow, help with pricing strategies, and make informed decisions.
Can MRR predict the health of a business?
MRR can be negative when a business experiences a high level of Churn or if they decrease their pricing or service offerings. A negative MRR can indicate a decline in the business’s financial health.
Conclusion
Financial metrics like MRR are essential because they help businesses track their financial performance, make informed business decisions, and improve operational efficiency. By monitoring these metrics regularly, companies can identify areas for improvement and take action to improve their financial health. Organizations can benefit significantly by using an agile OKR methodology to manage goals and track progress. A comprehensive software with OKR tracking tool will make it easy to align and collaborate with teams and track progress using metrics like MRR regularly.