What is MRR/Monthly Recurring Revenue?
Monthly Recurring Revenue (MRR) is the amount of predictable income you have: money from your SaaS product that you know will come through next month.
Coming up with an accurate MRR is crucial: you can’t understand your SaaS businesses’ revenues without one, and it’s probably also going to be the main way you track growth and predict future sales.
Why is MRR important?
Coming up with an accurate MRR might be tricky, especially if you’re just starting out or have unpredictable income.
But it’s also essential.
If you don’t, you run the risk of misjudging your growth and making misguided decisions when trying to improve your sales. Inaccurately calculating MRR could also mean you’re misleading your investors.
To make any kind of decision about your SaaS business, you need some sense of how much money it’s going to bring in next month.
The more months of recurring revenue you have tracked, the easier it becomes to make predictions about growth, analyze where you went wrong, and make changes.
Properly calculating MRR empowers you to take your company’s growth and momentum into your own hands, and gives you an accurate picture of where you are and where you’re headed.
Calculating monthly recurring revenue
Calculating your MRR sounds pretty straightforward (and for the most part, it is). A simple equation for MRR would be:
MRR = revenue per account x number of subscribers
But there are many things that might complicate that calculation.
Most subscription services offer their customers a variety of payment plans to choose from; for example, a monthly, quarterly, or annual subscription plan. Sometimes they might offer different price tiers too.
If all of your customers are on the same plan, calculating your recurring revenue will be a walk in the park, but that’s rarely the case. Most often, you’ll need to split your monthly recurring revenue calculation into numerous parts: for example, into MRR from monthly subscribers and MRR from annual subscribers.
Let's look at an example
Let’s say we offer both a monthly and an annual plan, and offer our customers a 10% discount when they purchase an annual subscription and pay upfront. And let's say we have 100 customers subscribed to each service.
Step 1. Calculate MRR for each customer type
First we calculate MRR separately for each customer type:
MRR from Monthly Subscriptions = $50 / month x 100 customers
MRR from Monthly Subscriptions = $5,000
Our monthly plan is already split up into the revenue that will be recurring each month. Instead of adding our annual subscriptions from the month as a single transaction for the month purchased, we want to see what it looks like each month.
In the accounting world, there is a GAAP (generally accepted accounting principle) rule that states if a customer prepays for something, while you might have collected that cash, you haven’t yet fulfilled that service they prepaid for.
Because of that, annual subscriptions need to broken down to a monthly amount for reporting purposes.
Annual plan: $50 / month X 100 cx *10 = $4,500
(Be sure to apply all discounts offered on your subscriptions to get an accurate monthly amount.)
Step 2. Combine our Annual and Monthly Subscriptions
Now that we’ve got our annual members broken down into monthly memberships we can easily add them to our other monthly members.
Monthly Plan = $50 / month x 100 customers = $5,000
Annual Plan with 10% discount = $50 / month x 100 customers * 10% = $4,500
$5,000 + $4,500 = $9,500
Troubleshooting your MRR
As mentioned previously, while calculating monthly recurring revenue is relatively simple, there are some common errors that get in the way of accurate metrics. Here are some of them.
Not breaking down annual contracts into a monthly ammount
A common and understandable mistake is to count quarterly, semi-annual, or annual subscriptions as a single payment for the month.
While this makes sense when calculating your cash flow, it gets in the way of the main function of MRR: measuring momentum.
The purpose of MRR isn’t only for seeing your cashflow, it’s for getting an accurate view of your monthly growth, and seeing how quickly and effectively you’re expanding. When including all these at once, you lose sight of other important metrics like your customer churn and customer count.
Including one-time payments
Many subscription based services include one-time purchases as an option. While this is great for letting your customers try out a product or service, or even potentially as a sales boost, these purchases aren’t recurring and need to be excluded from the MRR calculation.
Including any sales that aren’t recurring into your Monthly Recurring Revenue will inflate your revenue expectations and ruin your financial model.
Including trial subscriptions
It may seem self-explanatory not to include customers who haven’t actually paid in the case of a free trial, but you’d be surprised by how often businesses will include trail subscribers and their expected subscriptions before they’ve made the commitment.
In addition to that, it’s useful to split MRR into subcomponents:
- New MRR – The MRR from new and returning customers
- Lost or Churned MRR – The MRR lost due to leaving customers
- Upgrade MRR – The MRR from plan upgrades
- Downgrade MRR – The MRR from plan downgrades
Terms Expansion MRR and Contraction MRR are often used synonymously with Upgrade and Downgrade MRR. If you are looking only at the top-level MRR, they mean the same thing.
However, Expansion and Contraction MRR are used in the following formula:
New MRR + Expansion MRR - Contraction MRR - Lost MRR = MRR Growth
Unless a different definition is used, the formula above stops working at the plan level.
It’s also worth noting that different businesses have different definitions of Upgrades and Downgrades. For example, when a customer moves from annual to monthly plan, is that an upgrade or downgrade?
MRR Growth is also called Net New MRR. FirstOfficer discourages the use of Net New MRR and recommends using MRR Growth instead.