Monthly Recurring Revenue (MRR) is revenue that a SaaS business can depend on receiving each and every single month. Founders and investors like the predictable nature of this revenue source and is probably the most important metrics of a subscription business.
As Monthly Recurring Revenue is the same thing as MRR, you can read the detailed explanation of MRR in this detailed MRR blog.
Once a customer is acquired, they keep paying money every month unless they cancel (or churn) their subscription. There is no need to do sales every month to get a client to pay money again. However, whilst there are real advantages over new sales, there are new challenges and priorities for customers which are retaining customers so that they don’t churn.
Monthly Recurring Revenue is a predictable and recurring component of a subscription business. It does not include one-off and variable fees (such as professional services)
Founders of companies can track their Monthly Recurring Revenue month to month and understand how their business is performing. To calculate your monthly recurring revenue, you simply multiply your total number of paying users by the average revenue per user (ARPU).
Monthly Recurring Revenue is composed of three main parts
This is a simple explanation:
- Existing MRR: Since the revenue is largely consistent and predictable, your MRR will always have a base with the previous revenue you generate from existing clients
- New MRR: As you acquire most customers, revenue will come from these new customer acquisitions.
- Expansion MRR: Once you have customers, you can make more money from them. Expansion MRR involves up-selling and cross-selling. Successful businesses are often based on your ability to increase revenue from your existing customer base.
- Churn MRR: Losing customers is indicative of an underperforming SaaS business. When you lose customers you also churn revenue. You can also lose money from customers when they downgrade their subscriptions to lower pricing tier.
The great thing about SaaS businesses is your ability to analyze your metrics and ratios. A lot of metrics and ratios are based on MRR, including LTV and CAC/LTV.
There are two ways to calculate Monthly Recurring revenue
Customer-by-Customer
In this case, you calculate your MRR on an individual basis and add them all up.
- Calculate the monthly sum paid by each customer
- Your MRR is the sum of the monthly payments for all customers
Average Revenue Per Account (ARPA)
On this basis, you use averages to come to your MRR.
- Calculate the total revenue generated by all of your customers during the month you are calculating
- Determine the monthly ARPA paid by all of your customers on average
- Multiply the ARPA by the total number of customers to determine your MRR
There are 3 main uses of MRR
Companies use MRR to:
- Track performance: As a company wishing to grow you want a lot of insight into your business. MRR can help you understand how large the deals are that you are closing. enable salespeople to prioritize the accounts they are managing by size, and the new leads they have since their commission could be based on the new MRR that they close.
- Sales forecasts: Salespeople care about tracking MRR for commissions, but sales managers will also use this to manage their team. Founders will use the number to manage their company and their fundraising efforts.
- Budgeting: Businesses without predictable revenue have a harder time managing their business as they are less certain of the costs that they can incur. Knowing what your MRR will enable you to make new staff hires confidently.
To learn more about monthly recurring revenue you should read this detailed MRR blog. There is a wealth of information to up your game.
