MRR is your monthly recurring revenue.
Monthly Recurring Revenue (MRR) is your business's total predictable revenue from all active monthly subscriptions. This metric covers recurring charges from service agreements, coupons, discounts, add -ons and other recurring fees but excludes one-time charges like setup fees.
MRR is an essential metric for subscription businesses, especially for Saas companies. MRR tracks the numbers of new subscribers and existing customers upgrading or downgrading their plan or churning out, giving you a clear picture of your business growth or shrinkage. With the MRR metric, you can gauge your business's financial health, know where you need improvement and how forecast your future revenue.
So as not to confuse you at this stage. Monthly recurring revenue and revenue are related terms but have different meanings.
Revenue is your business's total income in exchange for your goods and services. Your revenue can be one-off or recurring.
You can calculate your company's recurring revenue yearly or monthly. Recurring revenue is the income your company expects to generate regularly. For the subscription business model, this means the regular subscription payment you hope for from your subscribers.
Monthly recurring revenue(MRR) is the monthly income your company expects to earn. Annual recurring revenue (ARR) is the income you expect to make yearly. It can be from each subscriber or your total customer.
Calculating MRR looks pretty straightforward, but it may be a bit complicated depending on the method you choose.
There are two methods of calculating MRR. You can calculate MRR with Average Revenue Per User (ARPU) or on a customer-to-customer basis.
Calculating MRR on a customer-to-customer basis is simple but less efficient than the ARPU method. However, you will still arrive at the same MRR figure either way.
For instance, if you have a subscriber that agrees to pay $200 every month for your service. The MRR from the customer is $200. If you have six such customers, you will multiply six by 200 to get the total MRR of your business.
MRR = Average Revenue Per User (ARPU) multiplied by the number of active customers
To understand this better, let us consider the following example. Let's say you have four customers.
Customer 1
Subscription plan: Basic
Revenue generated $(per month) : 40
Customer 2
Subscription plan: Premium
Revenue generated $(per month) : 100
Customer 3
Subscription plan: Premium
Revenue generated $(per month) : 100
Customer 4
Subscription plan: Advanced
Revenue generated $(per month) : 75
Monthly ARPU = ($40+$100+$100+$75) ÷ 4 = $78.75
Average monthly revenue = $78.95
MRR = ARPU x Number of customers = $78.75 x 4 = $315
All businesses encounter difficulties calculating their MRR because they include figures that aren't recurring and leave out some important figures. As such, take note of the following points ;
Although MRR depicts your expected monthly revenue, for MRR to track your business performance, you must break your MRR down to its simplest forms and thoroughly analyze it. Analyzing essential MRR components will give you an insight into your performance in customer acquisition, scaling, retention, and churning.
The following is the breakdown of your MRR;
New monthly recurring revenue is the monthly revenue generated by newly acquired customers. This metric shows the effectiveness of your customer acquisition strategy.
Upgrade MRR is the monthly recurring revenue generated from existing customers who either upgrade their plan or purchase a recurring add-on. Upgrade MRR tracks the scalability of your products and services along with your business growth. It points to your customer upsell or cross-sell strategy.
Expansion MRR is the additional recurring revenue generated from all your existing customers compared to the previous month. This additional revenue may come from upselling, reactivation of previously unsubscribed accounts, conversion of free customers to basic customers, or sales of add-ons.
Expansion MRR is calculated in terms of MRR growth rate.
The formula for expansion MRR
(Expansion MRR for the month / Total MRR at the beginning of the month) × 100
Contraction MRR is the opposite of expansion MRR. It shows a reduction in MRR compared to the previous month. Such reduction may be due to account downgrades, cancellations, subscription pauses, discounts, and removal of recurring add-ons. Contraction MRR is also an essential metric showing lapse in customer retention and scalability strategy.
Downgrade MRR is the monthly revenue reduction due to customers changing from a higher plan to a lower one within a month. Downgrade MRR also encompasses all other customer actions that result in a reduction of your MRR except cancellation.
Churn MRR is the percentage of lost revenue due to customer churn (customers that canceled their subscriptions within the month). Customers cancel their subscriptions for several reasons. It may be due to low product or service quality. Customers may also churn if their expectations were not met.
Reactivation MRR is the revenue increase due to lost customers who reactivated their subscriptions. To count as reactivation MRR, the customer must have previously contributed to your MRR - it differs from customers upgrading from a free to a paid plan.
Net new MRR is your MRR revenue growth rate compared to the previous month. Your Net new MRR might be positive or negative- it might have grown or shrunk compared to the last month.
Net New MRR= New MRR + Expansion MRR – Churned MRR.
CMRR is an extension of MRR. The company's monthly recurring revenue includes new bookings, downgrades, and churn. CMRR is regarded as a more in-depth metric for Saas business because it considers other factors that affect MRR, such as customer account cancellation (churn) and new account bookings, to give real-time MRR. CMRR calculation starts with existing MRR. All known new bookings and new MRR expansion will be added. Then known account downgrades and cancellations will be subtracted.
CMRR = MRR + New bookings – Expected Churn
MRR is an important metric that depicts your business growth trend. MRR provides insights that help you decide what steps to take to build your business by offering an accurate picture of your organization's revenue potential. You can easily forecast your future revenue and make intelligent business decisions with a predictable and consistent monthly revenue.
Investors can quickly measure the growth and performance of a company through its MRR. Although MRR is not part of Generally Accepted Accounting Principles ( GAAP), some investors still consider it an important metric. Some public companies that use subscription-based models include MRR in their annual reports.
Let's look at some of the additional ways MRR might be helpful:
MRR growth rate indicates positive business performance.
Even if some of your customers make annual payments, waiting till the end of the year is too late to track your business performance. As such, MRR helps you track your progress as you generate your income. With such metrics, you can predict your cash flow and determine your business progression toward your long-term goals.
MRR is an indication of new customers, upgrades, downgrades, and churn. MRR also helps you track the performance of each business unit and determine how they can improve. A slow increase in recent customer acquisition or hitting below the monthly MRR target may indicate some lapses in your sales team's efforts. By accurately tracking your MRR, your sales team can figure out potential issues and find ways to adjust their sales strategy.
You can use MRR to make sales projections and plan for your business growth. Projecting your revenue with MRR will give you a clear picture of the amount your business expects. If the MRR figures are below your goals, you can decide how better to reach your revenue goals.
MRR serves as a guide to your financial plan. MRR gives the management team a clear picture of the business and aids reasonable business decisions.
MRR projects business revenue and estimates how much you can afford to reinvest in your business growth. MRR also gives a picture of how to allocate your resources.
For instance, if your MRR metrics indicate low customer acquisition, high churn rate, or account downgrade, it may show that some of your customers are dissatisfied with services and your services aren't beneficial enough to attract new customers. You may want to improve your services and add more helpful features. You can also allocate more funds for marketing and lead generation.
The first step to increasing your MRR is to increase the number of paying customers, especially if you are a startup. To do this, you need to intensify your sales and marketing efforts.
Ensure you streamline your marketing effort to attract customers who are genuinely interested in your business. You can add more attractive features and offer customer discounts. You can also use a free trial as a lead generation strategy—leverage content marketing, social media marketing, email marketing, SEO, and PPC to generate more leads.
The higher customers pay for your services, the higher your revenue. Increasing your price can also lead to more monthly recurring customer payments. Do not let the fear of losing customers or the need to beat your competitors make you offer your service at a low price.
As long as you offer quality services, you can still stay on top of the competition with high prices and maintain your customer base. However, do not increase your price abruptly. You can add new features, increase the quality of your product or intensify your customer support. Ensure you improve your product and services to justify the price increment.
After creating a pricing plan, make an effort to increase your customer's contract value by selling them premium plans. You can increase your MRR by increasing the revenue generated per user.
Most platforms have a basic plan that allows customers to have a limited number of subscribers. You can upsell your customers in several ways. You can create a pop-up that encourages customers to upgrade their plan when they need the premium features the most.
Premium subscribers can access features that they need but are inaccessible in their current basic subscription package. When a customer's email list expands, the company uses this as an opportunity to upsell them to premium plans since they need it to accommodate their growing list of subscribers.
To also retain your customers and reduce MRR churn, you can offer discounts on annual or quarterly upfront payments. You can upsell your new customers to a yearly plan.
Customer churn is inevitable. However, a large amount of customer churn means something is wrong somewhere. A churn rate above 10% will eat deep into your profit and stifle your business growth. Even if you get more customers every month, recurring churn will continue to affect your MRR growth rate. As such, you should make an effort to keep churn as low as possible.
To Improve and reduce churn MRR, you need a foolproof customer retention strategy. To increase your customer retention, you can try;
The fact that some customers have unsubscribed from your service doesn't mean they are lost. You can still win them back. By doing that, you can increase your reactivation MRR
The first step is to gather your list of customer churns. You can follow them up with email flows informing them of your improved features or even offer them a discount for coming back.
Other bonuses are optional. There is no greater incentive for customers than offering them what they want. Customers will switch to your competitors if you are not offering the best services and prices. To retain and upsell your existing customers, you must maintain a good customer relationship. When your customers are happy, you can be assured of a steady MRR.
To satisfy your customers, first, you have to listen to them. Try to get feedback from your past and existing customers. What do they love or hate about your product? What will they want you to improve?
You can educate your customers on how to use your product and services. This will help them get maximum value. You can take the following steps toward that end;
