Also called: Recurring Revenue, Subscription Revenue, Recurring Billings, Recurring Payments, Subscription Billings, Subscription Payments, Monthly Recurring Billings, and Monthly Recurring Payments
See also: Annual Recurring Revenue (ARR), Churn, Customer Acquisition Cost (CAC), Retention Rate, Pricing Strategy
Relevant metrics: Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), Retention Rate, Average Revenue Per User (ARPU), Churn Rate, Expansion MRR, Net MRR, and Gross MRR
How to calculate Monthly Recurring Revenue (MRR):
MRR = Total number of paying customers × Average Revenue Per User (ARPU)
What is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue (MRR) is a financial metric commonly used by subscription-based businesses, particularly in the Software as a Service (SaaS) industry. MRR represents the predictable, recurring revenue that a company can expect to receive on a monthly basis from its customers, based on their subscription plans.
In subscription businesses, a constant influx of new customers and the churn of existing ones are inescapable. These dynamics leads to a constant flucatuation in the monthly revenue. MRR adeptly captures these flucutations and shows whether your revenue is increaisng, decreasing, and with what percentage.
A conventional monthly revenue calculation neglects critical factors such as annual subscriptions and alterations in subscription plans, consequently presenting a distorted view of an enterprise’s financial health. MRR transcends these limitations, not only offering insights into current circumstances but also enabling accurate estimations of future revenue. This empowers businesses to make enlightened decisions regarding budget allocation, investment strategies, and growth planning.
In this way, MRR is crucial for understanding the health and growth potential of subscription-based businesses, as it provides insights into the company’s revenue stream, stability, and scalability. It helps businesses forecast future revenue, manage cash flow, and make informed decisions about investments, growth strategies, and customer retention efforts.
To calculate MRR, a company typically multiplies the total number of paying customers by the average revenue per user (ARPU) for a given month. Some businesses also account for MRR variations, such as:
- New MRR. Revenue generated from new customers acquired during the month.
- Expansion MRR. Additional revenue generated from existing customers due to upselling, cross-selling, or upgrading their subscription plans.
- Churn MRR. Revenue lost from customers who cancel or downgrade their subscription plans.
- Net New MRR. The sum of New MRR and Expansion MRR minus Churn MRR, representing the overall change in MRR during the month.
Where did Monthly Recurring Revenue (MRR) come from?
As subscription-based businesses grew in popularity across various industries, it became essential for companies to find a way to measure their recurring revenue accurately. MRR emerged as a key financial metric that enabled businesses to track their predictable revenue on a monthly basis, taking into account factors such as customer acquisition, churn, and subscription upgrades or downgrades.
The widespread adoption of MRR as a performance indicator can be attributed to the success of pioneering SaaS companies like Salesforce, which demonstrated the value of leveraging recurring revenue streams to achieve scalable growth. Today, MRR is a vital metric for a wide range of subscription-based businesses, from SaaS companies to media, e-commerce, and membership platforms.
How do you calculate MRR?
To calculate MRR, you need to consider the total revenue generated from all your active subscription customers within a given month. Here’s a simple formula to calculate MRR:
MRR = Total number of paying customers × Average Revenue Per User (ARPU)
Follow these steps:
- Determine the total number of paying customers during the month. This includes all customers with an active subscription, regardless of the plan or billing cycle they are on.
- Calculate the Average Revenue Per User (ARPU) by dividing the total revenue generated from all your customers by the total number of paying customers. This will give you the average amount of revenue each customer contributes per month.
- Multiply the total number of paying customers by the ARPU to get the MRR.
An example MRR calculation
Let’s consider an example to illustrate how to calculate Monthly Recurring Revenue (MRR) for a fictional Software as a Service (SaaS) company:
Suppose the company offers three subscription plans:
- Basic Plan: $50 per month
- Pro Plan: $100 per month
- Enterprise Plan: $200 per month
At the end of the month, the company has:
150 customers on the Basic Plan
100 customers on the Pro Plan
50 customers on the Enterprise Plan
To calculate the MRR:
- First, find the total revenue for each subscription plan:
- Basic Plan: 150 customers × $50 = $7,500
- Pro Plan: 100 customers × $100 = $10,000
- Enterprise Plan: 50 customers × $200 = $10,000
- Add up the total revenue from all subscription plans:
- Total Revenue: $7,500 (Basic) + $10,000 (Pro) + $10,000 (Enterprise) = $27,500
- Calculate the total number of paying customers:
- Total Customers: 150 (Basic) + 100 (Pro) + 50 (Enterprise) = 300 customers
- Calculate the Average Revenue Per User (ARPU):
- ARPU: Total Revenue / Total Customers = $27,500 / 300 = $91.67
- Finally, calculate the MRR by multiplying the total number of paying customers by the ARPU:
- MRR: Total Customers × ARPU = 300 × $91.67 = $27,500
In this example, the MRR for the fictional SaaS company is $27,500.
MRR Variations
To calculate MRR, a company typically multiplies the total number of paying customers by the average revenue per user (ARPU) for a given month. Some businesses also account for MRR variations, such as:
- New MRR. This refers to the revenue generated from new customers who sign up for a subscription during a given month. It indicates the effectiveness of customer acquisition efforts.
- Upgrade MRR. This is the additional revenue generated when existing customers upgrade their subscription plans to a higher tier within the month.
- Downgrade MRR. This represents the decrease in revenue when existing customers move to a lower-priced subscription plan within the month.
- Expansion MRR. A combination of Upgrade MRR and any additional revenue generated through cross-selling or upselling to existing customers. Expansion MRR illustrates the success of efforts to increase the value of existing customer relationships.
- Reactivation MRR. This represents the revenue generated from customers who previously churned but have reactivated their subscription within the month. It demonstrates the effectiveness of win-back strategies.
- Contraction MRR. This encompasses both Downgrade MRR and any other reductions in revenue from existing customers, such as discounts or temporary pauses in subscriptions. Contraction MRR highlights revenue loss due to customer downgrades or changes in pricing.
- Churn MRR. This is the revenue lost due to customers canceling their subscription plans during the month. It provides insights into customer retention and satisfaction levels.
- Net New MRR. This is the overall change in MRR during the month, calculated by adding New MRR and Expansion MRR, then subtracting Churn MRR. Net New MRR offers a comprehensive view of a company’s MRR growth or decline, factoring in customer acquisition, retention, and expansion efforts.
Strategies for increasing MRR
Focusing on increasing Monthly Recurring Revenue (MRR) is essential for subscription-based businesses, as it provides a reliable measure of growth and sustainability. MRR offers insights into the health of a company’s revenue stream by capturing the dynamics of new customer acquisition, existing customer retention, and subscription plan changes. By concentrating on MRR instead of other, less comprehensive metrics, businesses can make data-driven decisions that effectively enhance customer lifetime value, optimize revenue generation, and ultimately, foster long-term success.
Customer Acquisition
Invest in targeted marketing efforts to attract new customers. Utilize various marketing channels such as content marketing, social media, email campaigns, and paid advertising to reach your target audience. Offer incentives, such as discounts, free trials, or referral programs, to encourage sign-ups. Optimize your website and marketing materials for conversion, ensuring clear messaging and a seamless user experience.
Reducing Churn
Focus on delivering excellent customer support and nurturing customer relationships. Identify potential churn risks and proactively address their concerns. Analyze the reasons for churn and implement improvements to your product or service accordingly. Ensure that customers receive value from your offerings, and maintain open communication channels to understand and resolve their issues.
Charge more
You may be underpricing your product due to fear of rejection. However, if your company is solving tangible problems for your customers, charging single-digit amounts is not adequate. Businesses pay for value, either to save time, save money or make more money. To test this theory, simply double your prices and wait. Without changing any other features, observe if your conversion rates or growth rates have declined. By continuously testing the effects of doubling your prices, you may find that it does not negatively impact your revenue growth or customer lifetime value, and may even increase them.
Remove your “free” plan
Consider eliminating your free plans as it may cause companies to give away too much of their product without receiving any monetary benefits. While offering a free plan can be viewed as a marketing tool, it could backfire because it sets the value conversation at $0. Furthermore, offering a free plan to gain customers may not be as beneficial as one might think. While it may help attract more customers, there may not be enough conversion rates to make the effort profitable. Additionally, it is costly to support free users, which may not be feasible for small businesses. While free plans may be beneficial for consumer businesses, they may not work well in other business scenarios. In place of a free plan, companies can consider offering a time-limited free trial to allow potential customers to try out the software. This approach would enable users to experience the product’s value, increasing the likelihood of conversion.
Remove your “unlimited” plan
Consider to to never offer an “unlimited” plan. While it may be tempting to offer a plan with unlimited value for a high price, doing so caps the amount of income you can make on any given customer. Pricing should be based on value, and the more value you provide, the more money you should make. Offering an unlimited plan doesn’t make sense because it offers unlimited value to the customer, while capping your potential income. The customers who would use this plan are likely the ones who will be more than happy to pay you more for the value they receive. Instead of offering unlimited plans, consider finding a balance between the value you provide and the amount you charge, as customers will be willing to pay more for greater value.
Upselling and Cross-selling
Promote higher-tier subscription plans to existing customers by showcasing the added value and features. Offer complementary products or services to customers, creating additional revenue streams. Implement personalized recommendations based on customer preferences and usage patterns, ensuring that each customer feels understood and catered to.
Expansion MRR
Encourage customers to upgrade their subscription plans by offering exclusive features or benefits. Leverage usage-based pricing, charging customers based on their consumption of your product or service. Offer add-ons or additional services that can enhance the customer’s experience and increase their spending, driving further revenue growth.
Reactivation of Churned Customers
Reach out to churned customers with targeted campaigns, offering incentives or showcasing improvements made since they left. Analyze churn reasons to tailor reactivation efforts and address specific pain points. Offer win-back promotions, such as discounts or limited-time offers, to entice customers to return, thus increasing overall MRR.
Optimizing Pricing Strategy
Regularly review and adjust your pricing strategy to ensure it aligns with market trends and customer expectations. Test different pricing tiers and structures to determine the most effective approach for your target audience. Consider value-based pricing, where you charge customers based on the perceived value of your product or service, maximizing revenue while keeping customers satisfied.
Improving Product or Service Quality
Continuously work on enhancing the features, usability, and overall quality of your product or service. Actively solicit customer feedback and use it to inform product development decisions. Keep an eye on industry trends and competitor offerings to ensure your product remains relevant and competitive, driving customer satisfaction and increased MRR.
Common pitfalls when calculating MRR
Some of the common mistakes when calculating MRR are mentioned below.
Misrepresenting Multi-period Contracts
Incorporating the full value of quarterly, semi-annual, or annual contracts into a single month’s MRR calculation is a common mistake. Even if the payment is received upfront, the subscription value should be divided by the contract duration. MRR is intended to measure growth momentum, not cash flow. Including the entire contract value at once distorts other metrics, such as customer churn rate, customer count, and customer lifetime value. Instead, account for the full cash value in your bookings calculations.
Deducting Transaction Fees and Delinquent Charges
You may be tempted to subtract transaction fees and delinquent charges from MRR totals for a more conservative and accurate calculation. However, this approach is misleading. Delinquent charges occupy a gray area between churn and active status. In an end-of-month (EOM) calculation, delinquent charges are considered lost because the monthly subscription fee was not collected. Instead, separate delinquent charges into their own category, allowing for accurate measurement and reduction of revenue loss due to failed or expired credit cards.
Including transaction fees understates your revenue and obscures potential optimization opportunities. While reducing transaction fees to 0% is unrealistic, switching billing systems or implementing your own solution can optimize costs. Remember that any expense that can be optimized should be classified as an expense, not deducted from MRR.
Incorporating One-time Payments
One-time sales and payments are not recurring and should not be included in Monthly Recurring Revenue calculations. Factoring them into MRR inflates revenue expectations and skews the financial model.
Factoring in Trials
A significant mistake is including trials and their anticipated subscription value before they convert into actual customers. This practice results in an inflated count of net new customers and churned customers, as not all trials convert.
Ignoring Discounts
Failing to account for discounts in MRR calculations is a misleading error. If a customer receives a discount on a $100/month plan, reducing their payment to $50/month, the MRR should be $50/month, not $100/month. Excluding discounts from calculations can lead to an inaccurate representation of your MRR.
What are other key metrics to use with MRR?
Here are some key metrics to use alongside MRR:
- Customer Acquisition Cost (CAC). CAC measures the amount of money a business spends to acquire each new customer. It’s calculated by dividing the total marketing and sales costs by the number of new customers acquired in a given period. By tracking CAC, companies can ensure that their customer acquisition efforts are cost-effective and identify opportunities to optimize spending.
- Churn Rate. Churn rate represents the percentage of customers who cancel or don’t renew their subscriptions in a given period. High churn rates can indicate issues with product or service quality, customer support, or pricing. By tracking churn rate, businesses can identify areas for improvement and take proactive steps to reduce customer churn.
- Customer Lifetime Value (CLTV). CLTV measures the total revenue that a customer generates for a company during their entire lifetime as a customer. By calculating CLTV, companies can determine the profitability of each customer and identify ways to increase customer retention and revenue generation.
- Gross Margins. Gross margins represent the percentage of revenue that a company retains after accounting for the cost of goods sold. By tracking gross margins, businesses can understand their profitability and identify opportunities to reduce costs and optimize pricing.
- Net Promoter Score (NPS). NPS is a metric that measures customer loyalty and satisfaction by asking customers how likely they are to recommend a company to others on a scale of 0-10. By tracking NPS, companies can gauge the effectiveness of their customer support and product or service offerings and identify areas for improvement.
By considering these additional metrics alongside MRR, companies can develop a more comprehensive understanding of their business’s financial health, growth potential, and customer satisfaction.
Forecasting MRR
Forecasting Monthly Recurring Revenue (MRR) can help you make informed decisions about budgeting, investing, and scaling. Here are some steps to forecast MRR:
- Analyze historical data. Start by analyzing your past MRR data to look for any trends, seasonality, or patterns. This will give you a baseline to start forecasting future MRR.
- Use customer data. Customer data such as customer acquisition rates, churn rates, and customer lifetime value can provide valuable insights into your future MRR. By analyzing this data, you can identify trends and patterns that can help you forecast future MRR.
- Consider market trends. Look at industry trends and how they might impact your business. For example, changes in consumer behavior or new competition may impact your MRR.
- Factor in new product launches. If you are planning to launch a new product or service, consider how it might impact your MRR. Will it increase the value of your existing subscriptions, or will it attract new subscribers?
- Use forecasting tools. There are many tools available that can help you forecast your MRR. These tools use algorithms and machine learning to analyze your data and provide accurate predictions.
- Regularly review and adjust. It’s important to regularly review your forecasts and adjust them based on new data or changes in the market. This will help ensure that your forecasts are accurate and up-to-date.
Examples
Salesforce
As a pioneer in the SaaS industry, Salesforce has consistently grown its MRR by offering a suite of CRM services with tiered pricing models, and by regularly adding new features and services to upsell and retain customers.
Slack
Slack has become a leading communication and collaboration tool for businesses by focusing on user growth and offering flexible pricing plans that cater to teams of all sizes. The company has effectively increased its MRR through customer retention, upselling, and expansion strategies.
Adobe
Adobe transitioned from a traditional software licensing model to a subscription-based model, which allowed them to tap into a more predictable and scalable revenue stream. By offering a suite of creative tools on a subscription basis, Adobe has successfully optimized its MRR and increased its market share.
Zendesk
Zendesk, a customer support and engagement platform, has managed to grow its MRR through a combination of tiered pricing, expansion to new markets, and by targeting customers across different industries.
HubSpot
HubSpot, a marketing, sales, and service software provider, has optimized its MRR through a freemium model, tiered pricing, and by offering a suite of interconnected products that encourage customers to expand their use of the platform.
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What is the purpose of tracking MRR?
Hint The purpose of tracking MRR is to measure the performance of a company's subscription-based services over time. It can be used to identify trends in customer acquisition, retention, and churn, as well as to measure the overall health of the business. -
What are the benefits of tracking MRR?
Hint The benefits of tracking MRR include being able to identify trends in customer acquisition, retention, and churn, as well as to measure the overall health of the business. It can also be used to inform pricing decisions and to identify areas of improvement. -
What are the potential risks associated with tracking MRR?
Hint The potential risks associated with tracking MRR include the potential for inaccurate data due to incorrect customer data or incorrect pricing. Additionally, tracking MRR can lead to a focus on short-term gains rather than long-term growth. -
How will MRR be reported?
Hint MRR will be reported in a variety of ways, including in financial statements, investor presentations, and other reports. -
What are the implications of tracking MRR?
Hint The implications of tracking MRR include being able to identify trends in customer acquisition, retention, and churn, as well as to measure the overall health of the business. It can also be used to inform pricing decisions and to identify areas of improvement. -
How will MRR be used to inform business decisions?
Hint MRR can be used to inform business decisions by providing insight into customer acquisition, retention, and churn, as well as to measure the overall health of the business. It can also be used to inform pricing decisions and to identify areas of improvement. -
What are the potential pitfalls of tracking MRR?
Hint The potential pitfalls of tracking MRR include the potential for inaccurate data due to incorrect customer data or incorrect pricing. Additionally, tracking MRR can lead to a focus on short-term gains rather than long-term growth. -
How will MRR be used to measure success?
Hint MRR can be used to measure success by providing insight into customer acquisition, retention, and churn, as well as to measure the overall health of the business. It can also be used to inform pricing decisions and to identify areas of improvement.
You might also be interested in reading up on:
- David Skok @BostonVC
- Jason Lemkin @jasonlk
- Lincoln Murphy @lincolnmurphy
- Patrick Campbell @patticus
- David Hauser @dh
- The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrillow (2015)
- The Membership Economy: Find Your Super Users, Master the Forever Transaction, and Build Recurring Revenue by Robbie Kellman Baxter (2016)
- Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It by Tien Tzuo and Gabe Weisert (2018)
- From Impossible to Inevitable: How Hyper-Growth Companies Create Predictable Revenue by Aaron Ross and Jason Lemkin (2016)
- The SaaS Sales Method: Sales As a Science by Jacco van der Kooij and Fernando Pizarro (2018)
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