Recurring revenue is the center of the subscription business universe - not just for your personal accounts on Netflix, Spotify, and Amazon but also for any software-as-a-service (SaaS). And the key metric that any subscription-based business keeps a keen eye on is monthly recurring revenue (MRR).
Monthly recurring revenue, or MRR, is the predictable income a business earns each month from active subscriptions or ongoing services. In simpler terms, it's the steady stream of cash you can count on from your loyal subscriber base.
Calculating MRR lets you see the business's financial health, analyze growth, combat churn, and produce more revenue. Companies use subscription management tools to track everything related to subscriptions and billing, and MRR is a critical metric that's measured using these tools.
There isn't a single, universal MRR formula because it depends on your specific subscription model
However, a common approach is adding together all active and non-renewing subscriptions, excluding those in free trials or averaging your recurring revenue per user (ARPU) across all paying customers in a given month.
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For example, if your average revenue per customer is $500 and you have 20 subscribing customers this month, then the MRR is $10,000 (500*20).
When calculating MRR, you’ll want to include all recurring elements, account upgrades, downgrades, and lost MRR from churned customers. You don’t need to include recurring costs but don’t forget to subtract discounts, as doing so will completely ruin your final tally.
Calculating MRR isn’t as complicated. You can calculate it manually or use a specific subscription analytics tool. If you are calculating it manually, follow these steps.
Create a spreadsheet with customer IDs and their corresponding monthly subscription value. For multi-month subscriptions, divide the total contract value by the number of months.
Add up the monthly subscription values for all your customers in that month. This total represents your overall MRR.
Top-level information is relevant and great, but it’s better to get tedious. This means breaking things down by type of pricing plans, cohorts, etc. Follow the same process detailed in the first two steps for each segment to analyze their individual MRR.
Understanding your MRR growth is crucial to understanding your subscription base's health. This growth MRR rate is the net increase or decrease in MRR from one month to the next month.
To calculate MRR growth, categorize your MRR into cohorts such as new MRR (from new customers), add-on MRR (from upgrades or add-ons), and churn MRR (lost revenue from cancellations).
To get your total growth MRR, follow this equation:
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By following these steps, you can accurately measure your MRR, providing valuable insights into your business's recurring revenue performance and helping you make informed strategic decisions.
Let’s say your company rolls into 2024 with an average of $20,000 MRR in 2023. You sign three new customers, each with six-month contracts in January of 2024 for $1,500 each. Your MRR from January to June is $24,500. At the end of June, only two out of three customers re-sign, so you have to subtract $1,500 from $24,500. Your MRR for July to August is now $23,000.
Let’s go even further. At the end of August, two customers add a $300 per month add-on, boosting your MRR by $600. Your MRR from September to December is $23,600.
MRR can be broken down into several categories to provide a more nuanced view of your subscription business's health. Here are the key types of MRR:
This represents the additional recurring revenue generated from new customers signing up for your service in a given month. It's the lifeblood of your subscriber base growth.
New MRR = (Number of new xustomers) x (Monthly subscription price)
Imagine you acquire 10 new customers in a month, each paying $10/month. The new MRR here is $100/month.
This reflects the increased revenue coming from existing customers who upgrade their plans, add on features, or increase their usage (applicable for usage-based pricing models). It indicates the success of your upselling and cross-selling strategies.
Upgrade MRR = (Number of upgrading customers) x (Increase in monthly price)
Let's say 5 current customers upgrade their plan from $10/month to $15/month. The expansion MRR is $25/month.
Sometimes called resurrected MRR, this captures the revenue recovered from previously churned customers who decide to reactivate their subscriptions. It highlights the effectiveness of your win-back efforts.
Reactivation MRR = (Number of reactivated customers) x (Monthly subscription price)
If 2 customers who previously churned reactivate their $10/month plans, your reactivation MRR is $20/month.
Expansion MRR includes revenue from upgraded, reactivated and free-to-paid converted customers. Businesses with a freemium model often consider this metric.
This represents the revenue lost from existing customers who downgrade their plans or reduce their usage. It's crucial to monitor this metric to identify areas for improvement in customer satisfaction and plan offerings.
Contraction MRR = (Number of downgrading dustomers) x (Decrease in monthly price)
Suppose 3 customers downgrade their plan from $20/month to $15/month. Here, the contraction MRR is $15/month (negative value as it represents lost revenue).
This is the opposite of the new MRR and reflects the revenue lost due to customer cancellations. It's a vital metric to track as it directly impacts your overall MRR growth.
Churn MRR = (Number of churned customers) x (Monthly subscription price)
If you lose 4 customers who were each paying $15/month, your Churn MRR is -$60/month (negative value as it represents lost revenue).
This is a key performance indicator (KPI) that combines the positive aspects of MRR growth and subtracts the negative impact of churn. It provides a clear picture of your overall subscriber base health and growth trajectory. Here, the growth MRR will be $50/month. This shows some growth, but there's room to improve customer retention and reduce downgrades.
By understanding these different types of MRR, you gain valuable insights into various aspects of your subscription business.
Tracking and understanding your MRR will help you plan accordingly and repair the areas that are failing. You will identify areas for improvement in customer acquisition, retention, upselling, and win-back strategies, ultimately leading to sustainable revenue growth and user retention.
The reasons SaaS companies and product-based companies utilize MRR are significant. Below are some of the top uses of the MRR metric.
MRR provides a clear picture of your recurring revenue stream. This predictability allows you to forecast future income, plan expenses effectively, and make informed financial decisions with confidence.
By understanding your MRR and average customer lifespan, you can calculate your CLTV, which is the total revenue a customer generates over their entire relationship with your business. This helps you prioritize strategies that maximize customer retention and value extraction.
Tracking MRR over time allows you to monitor your business's growth trajectory. You can identify trends in customer acquisition, retention, and churn, allowing you to pinpoint areas for improvement and optimize your marketing, sales, and customer success efforts.
Let’s say you’re a B2C company, and you get a ton of subscription purchases around November and December, but they drop off around May. How can you find out what caused that drop five to six months later? Well, if you’re tracking and analyzing certain patterns through your MRR, it can help you understand the cause, and you can work on preventing it in the future.
MRR allows you to measure the effectiveness of your customer acquisition efforts. By comparing new customer acquisition costs to the revenue they generate, you can assess the return on investment (ROI) of your sales and marketing campaigns.
While keeping your own data confidential, industry benchmarks for MRR growth and churn can be valuable tools. You can compare your performance with competitors and identify areas where you might lag or excel.
For subscription businesses seeking investment, a strong and predictable MRR is a key metric for potential investors. Tracking and demonstrating healthy MRR growth can significantly improve your chances of securing funding.
So, tracking MRR is not just about keeping an eye on monthly revenue; It informs a lot about business health and the trajectory it should take in the future.
A good MRR depends on factors like growth rate, industry benchmarks, customer acquisition cost (CAC), customer lifetime value, churn rate, and business stage. Generally, early-stage startups aim for rapid MRR growth, while established businesses focus on maximizing MRR and minimizing churn.
Industry standards vary, but a healthy MRR should demonstrate consistent growth, a strong market position, and contribute towards profitability by covering operating expenses and achieving a favorable LTV/CAC ratio.
Another component in measuring revenue is annual recurring revenue (ARR). It’s the equivalent of MRR, but from a yearly perspective.
Both ARR and MRR are important SaaS metrics and allow you to plan for the short and long term. Using these metrics, you can obtain an elevated overview of your business and improve sales forecasting for the future.
MRR is an effective metric. If you’re not calculating it, you may be missing crucial information relevant to the success of your subscription business. If you are calculating MRR, take the next step: delve deeper into your MRR components and analyze churn, expansion MRR, and customer lifetime value.
Remember, a healthy MRR fosters predictable revenue, fuels growth, and ultimately paves the way for success in the subscription economy. So, embrace MRR and watch your subscription business flourish!
Are your subscription models perfect? Analyze them with subscription analytics tools and see better growth now.
This article was originally published in 2019. It has been updated with new information.
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