Introduction to Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) is the lifeblood of any subscription business, whether that is a SaaS company, or a publishing house or a service company. MRR is often claimed to be the easiest marketing metric to calculate, but if you just look at it as a simple formula, you’ll miss a lot of important information.
What is Monthly Recurring Revenue (MRR)
MRR normalises all your recurring revenue into one monthly amount. It allows you to average pricing plans and billing periods into on consistent number that you can monitor over time to identify trends on the growth of your business. MRR estimates the income you generate each month to show growth and the health of your business.
However, your Monthly Recurring Revenue numbers can be misleading. Most SaaS companies try to create regular growth in both the number of customers and the revenue they generate. The reality is that some periods of growth are slower than others, occasionally you’ll see no growth and you will also see periods of decline. Just looking at top-level MRR numbers will hide the reasons why these events happen. Which is why understanding the numbers that make up your MRR or to be precise, your Net New MRR, is important.
At this point, it is worth mentioning that MRR is not a number that should be used for any accounting purposes. It’s a marketing insight metric; a snapshot that gives you insight into where your revenue is coming from and what your revenue trend looks like. It is not intended to replace key financial metrics such as bookings and billings or deferred and recognised revenue. Nor, because MRR hides the effects of churn, should you try to use MRR as an element in a forecast. For that you need Committed MRR (see below).
What is Net New MRR and why does it matter?
As your business grows and adapts to the market, the makeup of your Monthly Recurring Revenue will change. In the early days, your MRR will be made up from new customers. As it grows, you’ll inevitably lose some customers and maybe win them back. You’ll also upgrade others and find that some want to reduce the amount they pay.
Net New MRR is a simple calculation that takes these changes into account. It’s:
- New MRR – MRR from new customers you bring in, plus
- Expansion MRR- Upgrades by existing customers, plus
- Reactivation MRR – MRR from returning customers, minus
- Contraction MRR – MRR lost by customers downgrading, minus
- Churned MRR – MRR lost due to customers cancelling
Understanding the make up of your Net New MRR allows you to dig into the reasons why your MRR changes month by month.
How to measure Monthly Recurring Revenue (MRR)
Like most marketing metrics, MRR should be measured at monthly. Anymore frequently and you’ll be reacting to one-off events that have no long-term significance. Any less frequently and you could miss opportunities to use the insights in your marketing planning.
What data sources do I use
The data about revenue should come from your billing system (something like Recurly or Chargify). If you don’t have a billing system, then take the data from your finance system. Information about whether this is a new, returning or current customer should also come from your billing or finance system and be used to update your CRM. You will also need to identify which customers have churned (cancelled) during the month.
Whichever system you pull the data from you will need to included the plan that the customer is on now and, if relevant, the plan that they were on.
How do I calculate my Monthly Recurring Revenue (MRR)
The Monthly Recurring Revenue formula is “number of customers x average billed amount”. So, if 10 customers pay you an average of €100 per month you have an MRR of €1,000
There are however, some important “nuances” that you should be aware of so that you are calculating your MRR correctly:
Not all customers are billed monthly
You may not be billing all (or even any) of your customers monthly. In some businesses quarterly and annual billing is quite common, though weekly billing is less common. If that is the case, then the revenue from those customers needs to be normalised into a monthly figure by:
- Dividing the revenue by 12 (annual invoices) or 3 (quarterly invoices). Thus €2,400 a year becomes €200 per month and €900 per quarter becomes €300 per month
- Multiplying weekly bills by 4.33 (52 weeks divided by 12 months). Thus €20 per week becomes €86.60 per month
Don’t include non-recurring revenue in MRR
You may be charging customers “one-off” fees for setup or administration or implementation and so on. Be sure that you don’t include these in your revenue calculations otherwise you will inflate your Monthly Recurring Revenue figures. Likewise, exclude monthly instalments and any subscription that does not keep auto-renewing until it is cancelled.
Don’t include leads and trials in MRR
There’s no doubt that some leads or trials will convert into paying customers. You may even have a very consistent Lead to Customer Rate. However, you must avoid including an estimate of the number of customers who may eventually start paying you into your Monthly Recurring Revenue calculation. MRR is based on customers how ARE paying you, not on those who MIGHT pay you. That’s a completely different figure.
Don’t ignore coupons and discounts when calculating Monthly Recurring Revenue
If you are reducing the revenue you get from a customer in any way, then you need to take that into account when you calculate your MRR.
If you are offering a customer 10% off a €100 per month fee, then their MRR is €90 a month. Likewise, if you are offer a customer their 1st-month free on a 12-month agreement (and by the way, it’s always better to give the last-month free) their MRR should be calculated as the agreement value divided by 11-months.
In short, whether the deal is a on-off, short-term or applies to the duration of the deal, you need to adjust the MRR value of that customer accordingly.
How do I interpret my Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue is a trend metric. It lets you see how your revenue is growing over time and, once you have collected it over a couple of financial years, you may be able to use it to spot seasonality. Look at the following table (click to enlarge) and chart:
You can clearly see here a company that is doing well. MRR is growing – if not excitingly at least consistently. MRR has increased by almost 300% and all looks well.
But now let’s add some detail into the picture and take a look at the Net MRR performance:
The high-level figures are the same, but we have more detail to analyse and a more intriguing story to tell:
- We seem to be getting better at upgrading customers. In January, expansion MRR contributed 10%, but by December that had grown to 20%. Why? Could we bring in some of that revenue in our new MRR line? That would give us higher values from the start of subscriptions.
- We had four months where we had no reactivation revenue. But our win-back campaign is gaining traction. Good to see, but what about November and December? We should keep an eye on this campaign and see if it is levelling out or if that was just a seasonal impact.
- Yet something is undermining the success of that campaign. Increasing numbers of customers are downgrading and that is offsetting our win-back success. In fact, our contraction MRR is almost 50% of our expansion MRR (two-steps forward and one-step back!) and in December contraction ate 80% of our reactivation MRR. We need to talk to some customers and see why they have downgraded.
- Indeed, if we add together our contraction and our churn MRR for December, we lost 30% of the value we generated from new MRR and wiped out all the gains we made from upgrades and win-backs.
- In total we lost €35,000 to contraction and churn and bought in €33,250 in expansion and reactivation. Is this an issue with customer service? Should we be investing in a retention campaign? Do we have a product or pricing issue? Whatever the cause, it’s a growing trend and we need to address it.
As you can see, if we had not dug deeper into our MRR numbers to analyse what drove them, we would have missed some significant information. With the detail we can question whether we are making the right marketing decisions and investments.
Are your pricing plans helping or hurting your business?
Understanding how your pricing plans contribute to Monthly Recurring Revenue is particularly important. Ideally – and probably unsurprisingly – you want most of your customers on your higher-value plans and as few as possible on your free or bottom-tier plans. In an ideal world the Pareto Principle would hold good and 80% of your MRR would come from 20% of your customers.
However, in many subscription-based businesses, especially in the early days, the reverse is true and 20% of MRR comes from 80% of customers. If this is the case for you, you need to look at your costs to service and at your plans to grow your business and enhance your product to see if you can afford these customers.
Though it is important to note that you should not be over-reliant on a small number of customers for your MRR. If you are, and you lose one or two, your business could be at risk.
In the table above the story that we see is that:
- 70% of our subscribers bring in no revenue at all. If they also bring no support burden (unlikely) that is fine. But most companies will incur a cost to service these subscribers. We need to be sure that we can convert them into paying customers or monetise them, depending on your business model.
- 88% of our revenue comes from 29% of our customers, while our top 1% of customers brings in 12% of our MRR. That’s healthy because it means that we are not exposed if we lose one or two of our “Enterprise” customers.
- Our “Grow” plan is our most successful in terms of number of customers and the MRR it generates. How many of those customers started off on the Free plan? Why did they upgrade? What do they have in common?
What is Committed Monthly Recurring Revenue?
There is no formal definition for Committed MRR (CMRR) but most subscription-based businesses tend to take their Recognised MRR and add New Bookings, Expansion and Reactivation MRR, then subtract Contraction and Churn MRR. One-off charges are generally excluded from CMRR.
It’s important here to understand the importance of the term “recognised MRR”. It’s an accounting concept that says that revenue cannot appear on the P&L until the services have been completely delivered. This means that even if you invoice a customer on the first of the month for their subscription, your accountants won’t recognise the revenue until the first of the following month.
As CMRR is based on recognised revenue with churn taken into account along with increases in revenue, it gives you a better basis when used with a robust sales forecast, for forecasting your longer-term business potential. It’s the metric that investors, banks and boards like to see rather than MRR.
What benchmarks should I use?
As with any benchmark getting hold of reliable data that is relevant to your business and calculated in the same way as you calculate the metric is always a challenge. Naturally your Monthly Recurring Revenue is going to be unique to your business but it is possible to estimate benchmarks for metrics such as churn rate. Some analytics companies (especially those in the SaaS space) such as Klipinfo offer anonymised or aggregated benchmark intelligence services.
What other metrics should I look at when evaluating my Monthly Recurring Revenue (MRR)?
As mentioned above churn and acquisition rates are important when analysing MRR. In fact, you’ll be missing most of the story if you don’t factor them into your analysis. MRR Growth Rate is also important since it shows trajectory and velocity of growth and you’ll also want to understand your Average Revenue Per Account (ARPA).
A simple calculation of Monthly Recurring Revenue (MRR) can give you snapshot of the health of your business and its growth trend, however it really comes into its own when you dig deeper into the Net monthly Recurring Revenue (Net MRR) numbers. Net MRR allows you to understand where that revenue is coming from and gives you insights that can guide your decisions about marketing plans and investments.
Just be sure to exclude revenue that is not truly recurring from your calculations and remember to use Committed Monthly Recurring Revenue (CMRR) if you want a strong basis for forecasts that you might present to your board, investors or bankers.