In this article, we will explore in detail one of the most used SaaS metrics, the MRR (Monthly Recurring Revenue): what it is, how it is calculated, its relationship with other subscription business metrics, its importance, the types of MRR that exist and much more.
If you follow the indie hacking #BuildInPublic scene closely, you've probably seen screenshots like the one below on Twitter:
¡Yes! That’s MRR 🚀 (screenshot taken from the Eric Smith 𝕏 account)
MRR (Monthly Recurring Revenue) is the lifeblood of subscription based businesses like SaaS, newsletters, memberships etc. Imagine a company growing its customer base month after month and having a predictable and reliable stream of income. It’s not MAGIC, it’s a SaaS business!
As customers subscribe to the company’s offerings MRR grows and it’s a clear indicator of business health and potential. It’s a guiding light for strategic decisions and gives confidence to stakeholders.
MRR is the key to growth, forecasting and long term success. Consistent progress powered by recurring revenue.
Let’s go for it 👇
Understanding Monthly Recurring Revenue (MRR)
MRR is the monthly revenue from subscriptions or recurring transactions. This is the magic of subscriptions.
Since 2016 many technology companies have used the MRR model to get sustainable, predictable income streams from their products or services.
By doing so they have aligned their business to a recurring revenue model, so they can plan and predict for future growth better.
Having an MRR focused strategy allows you to measure your revenue health, find areas to improve and strengthen customer relationships by delivering value continuously.
In the end MRR can be the foundation of a business model that will last.
More new paying subs, less churn rate and more upgrades (subs who move to a higher / more expensive plan) = more MRR.
Is MRR the same as monthly revenue?
Monthly Recurring Revenue (MRR), as we have mentioned before, is the predictable revenue a business can expect to get every month from its subs or customers. This is especially important for subscription based businesses where revenue understanding and forecasting is key.
MRR consists of new subs, renewals and upgrades.
It gives you a clear view of income trends by normalizing revenues so you can see growth and profitability.
Monthly revenue can include one time purchases, seasonal sales fluctuations or sporadic revenue that’s not recurring.
Using only monthly revenue can hide the ongoing financial health of a business. MRR gives you a steady and reliable metric.
In the end while both are important MRR is a more solid foundation for future planning and expansion. Including MRR in your financials shows you’re committed to sustainable growth.
You sell 100 annual plans at $100 from a SaaS business ($10,000 in revenue) and that’s $830 MRR.
MRR vs. ARR: What’s the Difference?
MRR (Monthly Recurring Revenue) vs ARR (Annual Recurring Revenue) is important for financial planning as each gives you different insights.
MRR is the predictable revenue a business makes each month. Here the keyword is “month”.
This is super useful for short term financial health, to see trends and forecast growth on a monthly basis.
ARR (Annual Recurring Revenue) is the total revenue across a year. It’s super useful for long term planning, to align annual plans and objectives. In essence both are “north stars” for your business to achieve long term success.
Thus, to summarize, ‘MRR’ is a MONTHLY recurring revenue metric and ‘ARR’ is an ANNUAL recurring revenue metric.
How MRR Relates to Other SaaS Metrics
MRR is key to growth.
In the SaaS world, other important metrics are Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLTV). These SaaS metrics together give you a full picture of financial viability so you can drill down into how well a company is generating recurring revenue. The synergy between MRR, CAC and CLTV will show you how well your growth strategies are working.
MRR intersects with churn rate.
Churn rate is a retention metric that impacts MRR. A lower churn rate means a steady MRR and more financial predictability and sustainability. So optimizing churn rate is crucial for consistent MRR growth.
Tracking MRR with ARPU gives you visibility into revenue growth drivers. If MRR goes up and ARPU stays the same, it means customer base growth. If both go up, it means upselling or cross-selling is working. MRR and ARPU together give you actionable insights to make decisions to move the business forward.
BTW, having SaaS metrics under control is a must for all companies.
Why MRR is Key for SaaS
MRR gives you predictable and stable revenue. As simple as that.
This steady stream of revenue lets you plan. With MRR you can forecast your finances more accurately and make informed decisions that drive growth. Plus MRR is a gauge of customer satisfaction and engagement - how well does the product or service meet the market need.
This is super valuable.
MRR helps with strategic resource allocation, reduces revenue volatility risk. It gives you a financial snapshot and lets you pounce on opportunities.
And MRR shows the size of your subscription base. Grow MRR and you get predictable income, customer retention and market dominance.
The Basics of MRR Calculation
MRR calculation is key to any SaaS business wanting to be successful in the long term.
At its simplest MRR is the sum of all recurring revenue from all active subscriptions each month, minus one off fees or irregular payments, so we can focus on cash flow. This is so we can plan and grow.
Conceptually MRR is just the number of active users x average monthly subscription. This is the basic view of the monthly financial landscape.
In reality you may have multiple subscription tiers, upgrades, downgrades and churn rates so you can see the full picture of revenue. By including these complexities you can make better decisions with financial facts.
Read more | How to calculate MRR (Baremetrics)
Common Mistakes in MRR Calculation
Misunderstanding the scope of revenue can mess with MRR.
One of the most common mistakes is including one time charges or non recurring revenue in the MRR calculation. These numbers might look good for a quick win but misrepresent the actual predictable revenue and lead to wrong expectations and strategies for MRR projections.
And excluding big downgrades or cancellations from the MRR equation is another mistake. You gotta subtract those out to get an accurate and realistic revenue picture.
And some businesses forget to account for currency exchange if they are international. This can mess with MRR and cause financial surprises, making your revenue metrics not accurate and reliable and impacting long term planning and resource allocation.
Key MRR Components
Firstly, new subscriptions allows for month to month tracking.
Then you need to consider any growth and contraction movements, like upgrades and downgrades within the subscription base, so you have a broad but accurate financial view. These movements show customer satisfaction and growth potential.
Lastly, churn, the cancellation of subscriptions, shows retention.
New MRR
New MRR is new revenue from new customers each month. This net new MRR is how you measure the growth and market fit of your product.
Having clarity on new subscriptions helps you focus on scaling, improve customer acquisition. It’s the foundation for predicting future revenue and market expansion.
New MRR is a leading metric for assessing immediate growth prospects and market traction.
Sharp tracking and analysis of New MRR gives you insights into your marketing campaigns, sales techniques and product market fit. By nurturing this metric you can refine your strategy to grow sustainably and beat the competition. New MRR will spark innovation and deliver better business results.
Expansion Monthly Recurring Revenue (MRR)
Expansion MRR is the incremental MRR from existing customers through upsells, cross-sells and add-ons.
Enhancing this metric enables companies to unlock fuller revenue potential.
Improving this metric allows you to unlock more revenue.
The chart above comes from Metabeta.
Companies that are good at customer relationships are better at driving expansion MRR through well aligned value propositions, tailored solutions and great customer support.
Churn MRR
Churn MRR is the MRR lost due to customer cancellations.
Churn is key to growth and financial stability. It shows you where to improve.
Businesses must scrutinize churn MRR to understand why customers are leaving. That’s where the magic happens.
Deploying retention strategies like better customer service and incentives can reduce churn rates big time.
Addressing churn MRR proactively means long term customer relationships and long term business success.
It’s normal for some subscribers to stop being subscribers, the important thing is to know WHY.
Reactivation MRR
Reactivation MRR is part of sustainable revenue, creating new growth paths by reactivating previously inactive customers.
Customer reactivation is about rekindling interest and showing value again.
Through targeted campaigns and personalized communications businesses can re-capture lapsed customers (those who previously disengaged) and re-activate them.
These initiatives can result in big MRR improvements and financial resilience.
Regular reactivation MRR analysis is key to finding patterns and reactivation strategies to keep the growth and customer engagement cycle going.
In the end a proactive approach to reactivation MRR not only revives revenue streams but also long term relationships, where customers feel valued and want to re-engage.
In my opinion and experience everything that adds (new) MRR is good and positive, but expansions and reactivations in a SaaS business are MAGIC 🧙♂️
Strategies to Increase MRR 🚀
Every SaaS business wants to grow MRR. That’s a FACT. The thing is... HOW?
To grow your MRR, try a proactive customer engagement approach and keep the communication going to avoid contraction MRR. Personalized interactions build relationships for life. And upsell and cross-sell can add new revenue streams and turn happy customers into brand advocates.
Simplify your onboarding process and make it fast and user friendly to max out customer satisfaction and usage rates. And regularly review and refine your subscription tiers to attract different customer segments and increase overall revenue.
By doing this your MRR will grow sustainably and successfully and financially stable and long term.
Product Upsells and Cross-Sells
Product upsells and cross-sells will make your offerings a rich tapestry of options and turn customer satisfaction into revenue growth.
These will bring existing customers into higher value engagement.
By recommending relevant upsells or cross-sells you increase the perceived value of the initial purchase and create a sense of a full customer experience.
This will increase customer loyalty and grow your MRR. Whether through data analytics or customer insight you can find the perfect moments to upsell and cross-sell. Your path to “delight” = success and revenue growth.
Subscribers can go to a smaller plan (downgrade) or a bigger plan (upgrade). They can also buy other products (cross-sell).
Reducing Churn Rate
To maximize MRR (Monthly Recurring Revenue) you need to monitor net new MRR and reduce churn rate. Customers leaving your service or product early will compromise long term revenue.
Knowing the reasons for customer attrition is super valuable. Knowing why customers leave gives you the power to act strategically.
Personalized engagement will strengthen relationships. Customised communication will build loyalty and show you care about the individual customer.
And preventative measures like proactive support can fix issues before they become problems and increase overall customer satisfaction.
Invest in continuous improvement based on customer feedback. Systems that gather and act on feedback will prevent dissatisfaction and reduce churn.
Ultimately you want to create an environment where customers feel valued even when you mess up. This will build relationships for life that will grow, stabilize and increase your MRR.
Enhancing Customer Success
Customer success is key to MRR where customers renew. Proactive support, personal engagement and feedback mechanisms are the foundation.
Customer satisfaction starts with understanding their needs and wants.
Companies should map out the customer journey regularly, identifying touchpoints (intro, ongoing support, resolution) and expectations.
Targeted interventions based on this insight smooth out the customer experience, building strong long term relationships.
Ongoing success initiatives include addressing potential issues, educating customers and delivering value.
So all interactions deliver value.Boom! MRR grows.
MRR Monitoring and Reporting: Best Practices for SaaS Companies
MRR monitoring is a total game changer.
SaaS companies should start by defining MRR metrics so you can see the impact of new subs and overall revenue trends. This means segmenting MRR to track new subs, upgrades, downgrades and churn. Structured reports will show growth trends and areas to focus on. And make sure you’re using real time data so you can make decisions quickly.
Implement + Use robust analytics tools.
These will allow you to - in real time and through historical data - see trends and refine forecasts.
Standardize data collection so everyone is on the same page.
This will help cross functional teams like sales, marketing, finance and customer success to be aligned. Present MRR analytics in company wide meetings so everyone is informed and motivated. Use this to refine your business strategy and drive growth.
Some tools to track MRR (and other SaaS metrics) are ChartMogul and Baremetrics.
MRR Conclusions
In summary, MRR is a must have metric that gives you unparalleled visibility into your subscription based business health. By focusing on the core components of MRR, new subscriptions and churn and using product upsells and customer success initiatives companies can drive growth and predictability.
Understanding the differences between MRR and ARR and the other SaaS metrics will help you make data driven decisions. Monitoring and reporting MRR with best practices will ensure every move you make is financially healthy.
Related | What is a SaaS business
Now you know everything there is to know about MRR (Monthly Recurring Revenue). What do you think of the content? Let us know (when we enable comments 😜)
Learn more about the MRR SaaS KPI 🤓
pARRty is not the only blog talking about SaaS and MRR, far from it. Here are some very interesting resources on the topic we've covered in this article:
- What is MRR? Calculate & increase your monthly recurring revenue (Paddle)
- What is MRR, or monthly recurring revenue? How to calculate, increase and use MRR to guide growth (Stripe)
- What is Monthly Recurring Revenue (MRR) | How to calculate it (Zoho)?
- Monthly Recurring Revenue (MRR) (Corporate Finance Institute)
- What Is Monthly Recurring Revenue (MRR)? (HubSpot)