Monthly Recurring Revenue MRR
What is it? How to calculate it?
What is MRR?
Monthly Recurring Revenue, almost always referred 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 an 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 predicable 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 customers 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)
Average revenue per account
An easier way to calculate it, is 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 image 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 theirs 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 cancelling 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 you 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. Plus, you can get the best of both worlds like the SASS company Unbounce, they offer both monthly and annual plans.
Importance of Calculating Your MRR
- Determine if your sales and marketing efforts are effective.
- Know your sales’ strengths and opportunities.
- Determine the right budget for the next year to achieve your sales goals.
- Help business owners make sound business decisions based on the result of MRR.
Billing Clients Effectively Improves Your Monthly Recurring Revenue
Yes, billing your clients can help improve your MRR. However, whenever you bill clients, you have to make sure that the figures are accurate to avoid frustration on both parties. Even a simple, minor mistake can cause a major delay in payment, which can compromise the customer-business relationship and the sales performance of your staff and your customer.
That’s why when billing clients, using invoice templates is highly recommended. There are plenty of benefits on using such automatically generated invoice, including the following:
- Saves Time and Effort: With invoice templates, you’re able to save time and effort by entering all data in a spreadsheet and sending them to clients via email. All you have to do is to key in a small amount of relevant data, and everything gets automatically generated.
- Getting Paid On Time: Because you’ll able to create and send accurate invoices to your clients using the invoice template, you also get paid on time.
- Reflect Professional Business Reputation: Using an invoice template is a professional way to bill your clients, wherein you can add a description of the charges you’re billing them for following international standards.
- Suitable for Any Business: Whether you’re a small online retail store owner, a freelancer, or offer professional services, using invoice templates make your life a lot easier since accounting is easier to manage.
By now, you fully understand how to compute your monthly recurring revenue using the simple formula shared above. It’s crucial to calculate your MRR so you’ll know if your marketing efforts are effective.
Also, you realize how proper billing your clients can help you increase your MRR for the success of your business.
Blog article Bookings vs Revenues vs Billings https://saasmetrics.co/bookings-vs-revenues-vs-billings