Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue, or MRR, is a crucial metric used by SaaS or subscription businesses that shows the money that comes in every month from customers who are on a subscription (or contract).
What Is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue, or MRR, is a crucial metric used by SaaS or subscription businesses that shows the money that comes in every month from customers who are on a subscription (or contract).
Companies that offer monthly subscriptions use this metric to determine how much Monthly revenue they can expect for the next twelve months, assuming no other business is added or churned.
Some companies use Annual Recurring Revenue (ARR) metric, which is the same concept as MRR but expressed annually.
How to calculate MRR
The MRR formula considers all the recurring (ongoing) revenue within your business. To calculate MRR, simply add the dollar amount of monthly subscription revenue with the dollar amount gained from expansion revenue and then subtract the dollar amount lost from churn.
MRR Formula
MRR = (Overall Subscription Cost Per Month + Recurring Expansion Revenue) - Revenue Lost From Churned Customers
Expansion revenue (from recurring fees related to upgrades, upsells, and add-ons) affects the monthly subscription price of customers, so it must be included. However, your MRR calculation should exclude one-time charges or fees related to its products or services, such as one-time upsell, set-up fees, discounts, and any other non-recurring charges.
Why Is Monthly Recurring Revenue Important?
Monthly Recurring Revenue gives you an overview of how your business is performing month on month and enables you to forecast your growth more accurately over time. Having a solid foundation in your recurring revenue metrics can help you with the following:
- Understand the current state of your business
- Revenue forecasting
- Building lifelong customer relationship
- Attracting investors
Understand the current state of your business
A month-over-month analysis using MRR gives you the big picture of your business’s financial health. MRR measures the performance of the business in different areas, such as new sales, renewal rate, and upgrades, highlighting where revenue is growing and declining. With these insights, you can move forward on product planning, operational planning, and resource allocation.
Revenue forecasting
Planning the duration and cost of different subscriptions helps forecast revenue from potential clients. Tracking the value of renewals and the cost of lost customers (i.e. churn) helps businesses manage expenses more precisely, maintain cash resources, and chart the business’s growth trajectory in advance.
Building lifelong customer relationship
For SaaS or subscription businesses, it’s less about selling products and more about building long-term relationships and staying relevant to customers’ ongoing wants and needs. It’s only with retained subscribers that a company can achieve recurring revenue.
Understanding how MRR value changes over time can help a company design product experiences for high retention and lifetime relationships.
Attracting investors
Since MRR reflects the profitability and predictability of a subscription business, many investors value MRR as a key metric when evaluating startups and their founders as potential investments. With Monthlyized revenue, there is no risk for seasonality to a product or slow months where monthly or one-time revenue cannot be relied on. With MRR, investors can be ensured that there is clear profitability on an Monthly basis which provides more security for their investment.