A good place to start would be to ask ourselves, “What is MRR?”. In a nutshell, MRR measures the predictable, recurring revenue generated from customers on a monthly basis. As well as thinking about monthly recurring revenue in terms of meaning, it should also be noted that it’s an important metric for subscription-based companies, too. This is because it helps them forecast future revenue, identify growth trends and make strategic decisions.
What is Monthly Recurring Revenue (MRR)?
Monthly recurring revenue (MRR) is a financial metric that shows the revenue that a company expects to receive monthly from customers for providing them with products or services. Essentially, MRR measures the company’s normalized monthly revenue. Revenue normalization is critical for companies that offer various pricing plans for their products or services.
MRR provides an average number for a company’s recurring monthly revenue. It is commonly used by Software-as-a-Service (SaaS) companies that generate revenues using a subscription-based model.
Although MRR is not recognized by the accounting standards such as GAAP or IFRS, investors still monitor the metric. By analyzing a company’s MRR trend from month to month, investors can quickly evaluate its growth. Therefore, most public companies that use a SaaS business model report the metric in their quarterly and annual reports.
When Do We Use Monthly Recurring Revenue?
Monthly recurring revenue offers some important applications for companies. First, companies calculate the metric for financial forecasting. Consistency and predictability of the MRR ensure that a company can easily forecast its future revenue. When a company sees multiple periods with consistent monthly recurring revenues, it can easily model revenues into the future.
Monthly recurring revenue is used to evaluate a company’s growth trends. Again, MRR provides a smooth and normalized view of the revenues. Thus, a company can determine consistent and comparable growth trends.
Types of MRR
New MRR
MRR generated by new subscribers who have recently signed up for a product or service, representing the growth that occurred in the customer base.Expansion MRR
MRR generated by existing subscribers who have upgraded their subscription or added additional services or features, representing the increase in revenue per customer.Churn MRR
MRR lost due to customers cancelling their subscriptions, representing the loss of revenue due to customer attrition during that month.Reactivation MRR
MRR from subscribers who had previously cancelled their subscription but have now returned, representing the regained revenue due to customer retention.Contraction MRR
MRR lost due to existing subscribers downgrading their subscription or removing services or features, representing the loss of revenue per customer.Net New MRR
The sum of New MRR and Expansion MRR, minus the Churn MRR and Contraction MRR, representing the overall growth in monthly recurring revenue.
How to Calculate MRR?
1. From the Revenue per Customer- The easiest method to calculate the monthly recurring revenue is by determining the monthly recurring revenue per customer. First, we calculate the monthly revenue from each customer. Then, we find the sum of all revenues obtained from customers.
2. Using Average Revenue per User (ARPU)-Another method to calculate the MRR is by using the average revenue per user (ARPU). The first step in this method is the calculation of the monthly ARPU. It can be done using the following formula:
Note that all figures used in the formula above must be determined on a monthly basis.
After identifying the company’s monthly ARPU, calculate the MRR using the formula below:
Why MRR is important for businesses
Knowing about MMR and its meaning is not enough. MRR is a powerful metric for companies who use a subscription-based business model, because it allows them to predict future revenue, identify growth trends, pinpoint problem areas and make strategic decisions. For example, if a company has a steady MRR growth rate of 10% per month, they can predict that their revenue will double every seven months. This information can inform decisions on hiring, product development and marketing strategy. Similarly, if a company sees a decrease in MRR, it might indicate that they are losing customers. The company can then investigate the cause of the problem and make changes to improve retention.
FAQs
What is the difference between MRR and ARR (Annual Recurring Revenue)?
MRR measures the monthly revenue generated from subscriptions, while ARR measures the annual revenue generated from subscriptions. ARR is often used for annual contracts, while MRR provides a more granular view of revenue on a monthly basis.
How can businesses increase their MRR?
Businesses can increase their MRR by acquiring new customers, upselling or cross-selling additional products or features to existing customers, retaining customers by reducing churn, and increasing prices or introducing new pricing tiers.
What factors can impact MRR growth?
Factors such as customer acquisition rate, churn rate, expansion revenue from existing customers, changes in pricing, and changes in the number of subscribers can all impact MRR growth.
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