MRR or Monthly Recurring Revenue. What is MRR? How to calculate it?
MRR or Monthly Recurring Revenue almost always referred to as MRR, is probably the most important metric at all of any subscription business. It’s what makes this business model so great. Once you acquire a new customer you got a recurring revenue, which means you don’t have to worry about one-off sales every month. Different from traditional sales, it gives you new challenges such as retention and churn.
The general concept is that MRR is a measure of the predictable and recurring revenue components of your subscription business. It will typically exclude one-time and variable fees, but for month-to-month businesses could include such items.
How to calculate MRR?
The better way of doing it is to simply sum the monthly fee paid by every single paying customer of your installed base. So let’s say you have Customer A paying $200/mo and Customer B paying $100/mo. Your MRR would be $300. See that each customer may be paying a different amount since you can have different plans or event different products in your portfolio.
MRR = SUM(Paying customers monthly fee)
The average revenue per account
An easier way to calculate it is by using the ARPA. Once you know the average revenue per account (some times called average revenue per user), all you should do is multiply the total number of paying customers by the average amount all of those customers are paying you each month. So let’s say you have 10 paying customers and an average amount of $100/mo, your MRR would be $1,000.
MRR = ARPA * Total # of Customers
How to calculate MRR growth?
You might think that if you acquire more customers you MRR would grow, right? That’s true, but not the only aspect to be considered on a subscription business model. To analyze MRR – and specially MRR growth – we should consider three different aspects of MRR:
New MRR is the simply new revenue brought by brand new customers acquired. So let’s say you have acquired on a given month 5 new customers paying $100/mo and 2 new customers $200/mo. Your New MRR for that month would be $900.
Now imagine that you have 3 customers that upgrade their plans from $100/mo to $200/mo. That means you have expanded your revenue from existing customers, we call that Expansion MRR. Your Expansion MRR for that month would be $300. Keep in mind that Expansion MRR can come from upselling (customers upgrading their plans) or cross-selling (customers buying additional products or services).
And you should also consider churn. Churn MRR is the revenue that has been lost from customers canceling or downgrading their plans. So let’s say on a given month you had 2 cancellations of $100/mo plans and other 3 customers downgraded their plans from $200/mo to $100/mo. You Churn MRR would be $500. It simply means that you’ll have minus $500 on recurring revenue for next month. Keep in mind that MRR churn is different from customer churn.
Finally, to calculate your MRR growth you should actually consider all these three aspects on a formula.
Net New MRR = New MRR + Expansion MRR – Churn MRR
What about annual plans?
If you don’t bill on a monthly basis, you should normalize your revenue in a monthly amount in order to measure MRR. So if you have a $1,200 yearly plan, you’d just divide by 12 which would give you $100 MRR. In case your bill quarterly, you’d divide by 4. You can also do the other way round to measure the Annual Run Rate, or simply ARR, by multiplying you MRR per 12.