What is Monthly Recurring Revenue?
Monthly Recurring Revenue is a metric that reflects the total amount of predictable revenue that a company expects on a monthly basis. For example, if you have 10 customers and they pay you $50 per month, your MRR would be $500. MRR is highly used among subscription and SaaS companies. It is an important figure for tracking monthly revenue and understand the month-to-month differences in your subscription service.
How to calculate MRR?
MRR = Average Revenue Per Account(ARPA) * Total no. of accounts that month
For Example, You have 50 customers, each paying $1,200 per year. What will be MRR?
Based on their purchase you can expect to earn $100 ($1,200/12 months) in income each month per customer.
MRR = $100 * 50 = $5000
Types of MRR:
Breaking MRR down even further will help you look at revenue growth and trends to see if there are any areas you could improve upon.
- New MRR: New MRR is the monthly recurring revenue that's generated from brand new customers. For Ex: you have 10 new customers in a month, half of them pay $50/month and the other half pays $100/month - new MRR would be $750.
- Expansion MRR: It is the percentage of monthly recurring revenue from your existing customers. Expansion MRR is also known as an upgrade and can also result from an upsell or cross-sell. Using the example above, if four customers upgrade their contracts from $50 to $100/month - expansion MRR would be $200.
- Churn MRR: Churn MRR is the revenue that's been lost due to customers canceling or downgrading. So if one customer cancels their $50 subscription and three downgrade their monthly subscription from $100 to $50/month, the churn MRR would be $200. And this means you'll have less MRR to work with, in the upcoming months.
Importance of MRR:
- Financial Forecasting and Planning: In SaaS business, you’re able to make accurate financial projections because of the subscriptions, and a large part of that is because MRR is relatively consistent and predictable. As you gain subsequent months of consistent revenue you can begin to model estimates of where you’ll be and then can plan your business accordingly.
- Measuring growth and momentum: If you’re on the investor-backed or take over the world track, the growth in your MRR on a month over month time period is absolutely critical. MRR is a key indicator of the growth of a SaaS business and the month-over-month growth percentages will clearly indicate whether you’re on a rocket ship or you’re still on the launchpad fueling.
- Budgeting: Without a steady income stream, it's difficult to run a successful business. MRR tells business leaders how much money is coming in each month that can be reinvested.