MRR, or monthly-recurring-revenue, helps you understand your SaaS company’s health in a snapshot. In this article, we will explain what this metric is, how to calculate it for your own business, and exactly why it is so important to track it over time. As experts in SaaS digital marketing, we’ll also be providing a few tips and tactics to improve your company’s MRR.
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- What is MRR
- Tracking MRR: Why It Is Important
- How to Calculate MRR
- Improve Your Monthly Recurring Revenue
- Drive Growth for Your SaaS Company
What Is MRR
What does MRR stand for? MRR is Monthly-recurring-revenue or the calculation of revenue brought in by your company each month. Knowing the MRR for your SaaS business is vital because it gives you an updated view of your company’s well-being according to revenue.
MRR is tracked through income, which usually comes from the subscriptions coming in each month, but also factors other recurring add-ons and discounts. Factors that are one-time charges and not considered part of the MRR are ad hoc charges, non-recurring add-ons, or setup fees.
Why is MRR so important to SaaS companies? Most SaaS companies operate on a subscription model, so being able to see the money coming in on a monthly basis shows your health and gives a projection of the company’s success. MRR and the SaaS business model go hand in hand.
SaaS companies are looking for investors, so being able to show that revenue comes consistently is a great selling point. If your company knows its MRR, you can look at trends to make better-educated choices regarding future plans, projecting future earnings, and deciding what to invest in and cut out of your SaaS company.
If you are interested in seeing other important performance calculations to improve your SaaS business, we have great advice regarding the best performance calculations to add to your scorecard.
MRR vs. Revenue
Now that you understand the meaning of MRR, let’s dive into why it is more than just recurring revenue.
Monthly-recurring-revenue gives a company a great view of its overall wellness, but other factors like revenue affect how a company’s financial outlook is generated.
- What is Revenue? Revenue, also known as the top line, is calculated from product sales, interest, and rent, but also factors in expenses to figure out the net income of your company in a given period. MRR tracks the money generated from the company’s subscriptions. It does not account for all money coming in or going out of the company. Revenue should be used for your business’s financial reporting because it shows what money comes in and out, so it is more accurate for accounting purposes.
- What is Recurring Revenue? The Recurring Revenue or the ARR, Annual Recurring Revenue, is the money generated by one year’s subscription. Recurring Revenue is more commonly used when looking at multi-year contracts and a broader view than MRR. Recurring Revenue can be a better way to get more of a long-term view of your company’s future, whereas MRR is better for short-term strategies.
Types of MRR
There are many different types of MRR that affect a company’s overall rate. Some types come from gaining new clients. Others come from losing clients. It is important to understand the different types because they can show trends that your company should take action on to improve.
Below we will define a few of the most common types of monthly recurring revenue your company will experience.
- New MRR – Revenue generated by new customers joining your subscription service in a given time period or month.
- Expansion MRR – The amount of additional revenue coming in from existing customers who subscribe to the service.
- Reactivation MRR – New monthly revenue coming from previously canceled or churned subscriptions that are now active again.
- Contraction MRR – The subtraction of subscriptions that canceled or downgraded their service compared to the prior month.
- Churned MRR – The monthly revenue lost because of customer churn or cancelations. Explore our guide on SaaS Churn to learn what it, why it matters, how to calculate yours, and tips to improve.
- Net New MRR – Added monthly revenue that new customers generate.
Looking for more ways to measure your SaaS success? Explore this list of 10 metrics to measure your ROI.
Tracking MOnthly-Recurring-Revenue: Why It’s Important
So far, we have defined MRR, discussed how it’s different from revenue, and listed the different types, but now we need to establish why it is so important. If a company does not know its monthly recurring revenue rate, it will not be able to forecast how much money has come in, how much money will come out, and how healthy the subscription base is. A company can lose important insights on trends if they do not have an accurate MRR and could end up making poor choices for their business’s future.
Having an accurate MRR is especially important in the SaaS industry because most companies run off of a subscription model for their service. If a SaaS company does not know how much money is coming in monthly, they will have no idea how stable their business is and if they even have a future.
1. Forecasting
One of the most important reasons to have an up-to-date MRR is so you can use this metric to plan your company’s future. When a SaaS company has an accurate monthly recurring revenue calculation, they can see trends happening that are positive, like new subscribers and upgrades, or negative, like downgrades and customers leaving. If a company can pivot using the information they gain from the MRR trends, they have a stronger likelihood of making better choices to improve their business.
2. Investors
Many SaaS companies rely on investors throughout their product cycle stages and having an updated MRR can help bring in more investors. When a SaaS business can show that it is consistently bringing in money every month, it will draw investors in and show them that you are destined for success. Calculating your business’s MRR is essential to acquiring new investors.
Even if your monthly recurring revenue is not going in the right direction, showing investors that you have up-to-date stats on your business may impress them. Although a company may be losing subscribers, if they keep accurate track of their MRR, they can easily pivot to make improvements and win subscribers back.
3. Efficiency
When a company has a current MRR model, it can easily track the money coming in and the money going out for that month. In addition, that company can use this model to see trends and act appropriately. Because they can see these trends, they will not overreact or be caught off guard.
A SaaS company might see a loss of subscriptions and still be in a great position with upgrades or higher value contracts being signed. The MRR metric is an important factor in understanding churn. If you aren’t familiar with the concept of churn, we recently created a guide that unpacks what churn is, why it matters, and how to calculate it.
How to Calculate MRR
We now know what MRR is and why it is so important to a SaaS business, but now the question is how to calculate MRR.
MRR Formula: MRR = ARPA X Total Number of Monthly Users
step one
To calculate monthly recurring revenue, the first step is finding the ARPA, which is the Average Revenue Per Account. The ARPA is the amount of money being brought in by each customer on a monthly basis. When finding the ARPA, only look at the average of what is being brought in each month or recurring subscription revenue.
When calculating the ARPA, don’t look at one-time charges like start-up fees or ad hoc charges. Add up the subscriptions and divide them by how many individual subscribers to get the average.
Total Subscriptions / individual subscribers = ARPA
step two
The second step is finding how many individual subscribers you have. If you have the ARPA, you should have the number of individual subscribers because you need that statistic to find the ARPA.
step three
The final step in finding the MRR is to multiply the ARPA by the total number of subscribers. In simpler terms, multiply the average amount paid by the subscribers by the number of total subscribers.
Example
A SaaS company has 10 subscribers, each paying an average of $100 a month (ARPA), multiply the 10 by 100, the MRR is $1,000.
100 X 10 = 1,000
Common Calculation Mistakes
In this blog, we have already shown why it is important to calculate MRR and the effect that statistics can have on your business, but the MRR is only effective if it is calculated correctly. We have also just shown you how to calculate MRR with an easy formula, but there are common mistakes one can make when figuring out their SaaS company’s MRR.
When a company has the wrong MRR, this can throw off all forecasting and faith in future business. If a SaaS company has an inaccurate calculation, their planning could lead to disaster. Below we will look at four common mistakes when calculating this important SaaS metric.
1. trial Subscribers
When calculating the MRR, a company cannot count the trial subscribers because they do not add any money toward the companies revenue. If the trial subscriber is in the calculation of MRR, this will throw off the final MRR statistic.
2. non-subscription sales
Do not add start-up fees, ad hoc services, or charges that are not on a monthly schedule. This money is not guaranteed each month, so it cannot be counted in the MRR and will throw off forecasting projections. When calculating MRR, only look at what each subscriber pays for the monthly subscription.
3. not calculated monthly
If your company does not have monthly subscriptions but quarterly or annually, convert them into monthly subscriptions when calculating MRR. If you have a quarterly subscription, divide the total by 4. If you have an annual subscription, divide the total by 12 for a monthly average. The MRR is for monthly forecasting. It allows you to see trends on a micro level, and it ensures the company has more recent statistics they can act on.
4. refunds
A company needs to maintain statistics on subscription refunds so they can have the most accurate MRR metric. If a company does not have its refunds in its final MRR calculations, these losses cannot be evaluated to improve on. Whether your MRR rate shows your company in a positive or negative position, it must be accurate, so your roadmap is not misguided.
Improve Your Monthly Recurring Revenue
Now you know everything there is to know about your MRR as it is. What if you want to improve yours? Whether your MRR is positive or negative, a successful company is always looking to gain more money and subscribers. Another way SaaS companies improve is by staying up-to-date on SaaS industry news and best practices. If you want a newsletter full of advice, insights, and best practices from SaaS industry leaders sent right to your inbox, sign up for the SaaS Scoop.
Now, let’s go over four great ideas to improve your MRR.
1. get more leads
This one is pretty obvious. If a SaaS company has more leads, it usually has more money coming in each month. This money strengthens the company as it earns more money and more users sign up to see how effective the service is, which attracts more investors. How do you get more leads? SaaS companies live and die by subscribers, here are some ways to improve your marketing methods to gain more leads.
2. Have yearly prepaid plans
If you are able to lock your customers into a yearly subscription, that will improve your MRR and increase the chance they will stay with your service. It can be difficult to gain the full value of certain subscription services in a single month, so being locked into a subscription for a full year gives the user plenty of time to discover your service’s full value.
If the subscriber has your service for a year and doesn’t see results, maybe it’s just not a good fit. Another benefit of yearly prepaid plans is that you can count on money coming in from that subscriber for the rest of the year. A company can provide a discount on yearly prepaid plans to incentivize customers to join their service.
3. Have upsell methods
It is more expensive to gain new customers than keep existing customers. When you have an option for upselling, whether that be with new features or added support, you can keep your customer and make more money. Having higher valued contracts will help balance customers leaving whose contracts are smaller.
A SaaS company could have its best month of the year (monetarily speaking) and still lose customers. Would you like to improve your marketing tactics to land high-value contracts? As a trusted SaaS marketing company with a proven track record of success, Augurian can help.
4. Move markets
If your SaaS company is not as successful as you feel it should be, maybe you are in the wrong market. Your service might be a great fit for a large company, but not for the smaller companies you have been targeting. The bigger businesses will pay more for your services, and you will get more value per customer.
These bigger accounts might be harder to land but are worth it if your service is a good fit. If you want to know more about what stage your SaaS company is in and if you could be ready to move markets, learn more about SaaS valuation multiples to determine the stage you are at in your life-cycle.
Drive Growth for Your SaaS Company with Augurian
After reading this article, you should better understand what MRR is, how to track and calculate MRR, and how to improve your MMR. This metric gives your company a great way to view the business’s health from month to month, which allows for pivoting when necessary.
Proving that your company is committed to monthly recurring revenue is a great metric to show possible investors or clients to give them confidence in your service.
Calculating MRR is a way to check the temperature of your SaaS company’s finances. If your company wants to improve these types of growth metrics, our SaaS marketing agency can help.
Augurian helps SaaS companies achieve excellent results. Our powerful Digital Operating System fuels speedy growth for our SaaS clients. If you’re ready to grow your business, speak with an Augur today.
