by Sam Franklin | August 11, 2022 | 12 min read
SaaS metrics 101 – What is Monthly Recurring Revenue, and how to calculate it?Get funded
Last updated: September 27, 2022
Monthly Recurring Revenue (MRR) is a critical metric in a SaaS company or subscription business. Recurring revenue is the backbone of any SaaS, and keeping an eye on financial metrics is essential to running a successful business.
MRR may appear like a simple and easy financial metric on the surface. However, if you fail to track it or make mistakes, you may have issues forecasting cash flow and growth, measuring your business’s overall performance and talking to investors.
In this guide, we’ll define what MRR is, why it’s important, the different types of MRR, and how to calculate, analyse, and increase MRR.
Table of contents
- What is Monthly Recurring Revenue?
- Why is tracking MRR important for your business?
- What are the different types of MRR?
- How to calculate MRR
- MRR analysis
- How to increase MRR
- Monthly Recurring Revenue (MRR) FAQ
What is Monthly Recurring Revenue?
Monthly Recurring Revenue is a key metric that shows the amount of predictable revenue your business generates on a monthly basis from all active subscriptions. MRR provides a way to simplify billing periods and pricing plans into a figure you can track over time.
In subscription businesses, new customers sign up while existing customers churn out, causing constant fluctuations in your revenue. MRR captures such movements to show whether your revenue is shrinking or growing and by what percentage.
MRR includes recurring charges from coupons, discounts, and add-ons while excluding one-time fees to assess your business’s current financial health accurately. If you have a good handle on churn rates and customer acquisition, MRR can help you extrapolate the future earnings you can expect from active subscriptions.
Why is tracking MRR important for your business?
Regular monthly revenue calculations do not consider subscription plan changes and annual subscriptions and can give misleading impressions of your business’s financial health. MRR provides key metrics into cash flow and sales dynamics, giving you an accurate picture of your business’s revenue potential.
It helps you make informed decisions about investing, budgeting and scaling by:
MRR keeps track of month-over-month trends and provides near-term insights into your business’s financial performance. When measuring a subscription business’s growth, a week is considered too short and a year too long to check how the business is performing.
A month is a reasonable period. Unlike one-off sales, where customers make full payments at the time of purchase, revenue from what customers pay trickles in small amounts in a subscription-based business. Through MRR, you can measure the performance of your SaaS business, keep track of what’s working and not working, and make the necessary changes that keep your company out of trouble.
You can use MRR to accurately predict how much income revenue flows into your business monthly. You can match this revenue with the business expenses to get an accurate picture of the resources you have at your disposal to reinvest in the business. As such, MRR helps you confidently make reliable decisions and budget for business expansion.
MRR projections also come in handy when you need to identify areas where you need to increase spending and where you need to cut back. If, for example, your new MRR is declining but is higher than the previous month, you can deduce that current customers are happy with the service or product, but not enough new ones are subscribing.
Therefore, you can allocate more resources to lead generation to help new customers discover your business.
The consistency and predictability of MRR ensure that you can easily forecast future revenue. You can make accurate sales projections and plan for short-term and long-term revenue growth. You can anticipate the next month’s revenue by analysing your business’s monthly performance and deciding on needed changes to increase revenue.
MRR provides a good indication of your company’s growth, and investors will monitor your company’s MRR trends to determine whether you’re destined for success. Most SaaS companies need toraise funds throughout their product life cycle, and having an updated MRR can help bring in more investors.
What are the different types of MRR?
MRR can be broken down into specific types, offering valuable insights into customer behaviour, revenue, and business health. These include:
New MRR is the additional monthly recurring revenue gained from new customer acquisitions. For instance, if you add a new customer to your monthly subscription plans, the income they contribute is new MRR.
Upgrade and Downgrade MRR
Upgrade MRR refers to additional revenue when customers upgrade from existing pricing plans to higher plans. When calculating Upgrade MRR, you also consider subscription add-ons.
For example, if an existing customer moves from a basic plan of £100/month to a standard plan of £200/month and purchases an add-on for £50/month, the upgrade MRR will be £200 - £100 + £50 = £150.
Downgrade MRR refers to the reduced revenue from monthly subscriptions that have moved from the existing plan to a lower plan.
For example, if a customer downgrades their monthly subscription from a standard plan of £200/month to a basic plan of £100/month, the Downgrade MRR will be £200 - £100 = £100.
Contraction and Expansion MRR
Contraction MRR refers to the lost revenue caused by downgrades and subscription cancellations in a specific month. It can result from cancellations, downgrading, or discounts.
While downgrades can cause some Contraction MRR, it’s different from Downgrade MRR because other factors contribute to Contraction MRR.
For example, if you reward 50 customers with a £50 discount in a given month, the Contraction MRR will be 50 X £50 = £250.
Expansion MRR refers to additional revenue you gain from current customers in a month compared to the previous month. Expansion MRR shows you retained your customers and gained their loyalty. You can generate Expansion MRR revenue through upselling, add-ons, and cross-selling.
It’s great for your bottom line because you don’t incur any Customer Acquisition Costs (CACs) in sales to existing customers. You can calculate the monthly growth rate in Expansion MRR by dividing the Expansion MRR of that month by the total MRR at the beginning of that month.
For example, let’s assume your business has an MRR of £600k at the start of the month, and you gain an additional revenue of £16k of Expansion MRR through add-ons, cross-sells, and upsells to existing customers. The Expansion MRR monthly growth rate will be:
(£16k ÷ £600k) X 100 = 2.7%
Reactivation MRR is the monthly revenue you generate by reacquiring or winning back lost customers. It indicates that previously churned customers have returned to a paid plan, and you can achieve this through retargeting, emails, or simply reaching out to them.
For example, if ten of your churned customers reactivate their accounts in the same month and each subscribes to a £30/month plan, the Reactivation MRR for the month is £300.
Churn MRR refers to the total lost revenue in a specific month caused by cancelled subscriptions. For example, if two of your customers paying £500/month cancel their subscriptions in the same month, the Churn MRR for the month is £1,000.
Net New MRR
Net MRR shows the amount of gained or lost revenue in the current month. SaaS companies calculate Net New MRR by adding New MRR to Expansion MRR and deducting Churn MRR.
Having an excellent Net New MRR means you’ve gained revenue, but if it’s bad, you’ve lost revenue. For example, let’s assume three new customers subscribe and pay £100/month each. In the same month, five current customers upgrade from £100/month to £200/month and two customers each paying £200/month churn out.
Net New MRR = (3 x 100) + (5 x 100) – (2 x 200) = 300 + 500 – 400 = £400.
How to calculate MRR
Calculating MRR for your SaaS business is easy. Simply multiply the number of monthly subscribers by the average revenue per user (ARPU).
The basic formula for calculating MRR is:
MRR = number of subscribers in a monthly plan X monthly ARPU
MRR calculation example
Let’s assume you have seven subscribers for the £200/month plan.
MRR = 7 X 200 = £1,400.
Mistakes to avoid when calculating your MRR
While MRR seems like a simple metric to calculate, there are a few mistakes you need to avoid:
1. Including non-recurring revenue
The MRR figure helps you measure the growth and health the company expects to gain in future. When you include one-time set-up fees and other non-recurring revenues, you artificially inflate your MRR figure and set yourself up for failure. Your MRR figure should never have any payment that doesn’t automatically occur in perpetuity until the customer decides to stop the service.
2. Incorrect non-monthly billing intervals
By definition, MRR is a monthly figure. However, you can also bill a customer annually, weekly or quarterly, and it’s easy to incorrectly use these figures and end up with amisleading MRR.
To ensure you correctly include non-monthly intervals in a monthly recurring revenue MRR, you must normalise it. Normalisation is critical for SaaS companies with varying billing intervals when calculating the company’s recurring revenue.
For example, if you bill a customer £2,400 annually, you normalise it by dividing the number by 12. You’ll then include £200/month in the MRR figure.
3. Including Trials and Leads
Although a certain percentage of your trial customers and leads will convert and become part of your MRR, you shouldn’t add them to your MRR figure, regardless of how consistent and reliable your conversion rate is. Customers signing in to trial plans are not customers yet, and they’ll only inflate the MRR figure and not become recurring customers.
It’s best to leave trials and leads out of your MRR calculation.
4. Failing to include MRR components
There are many types of MRR, each providing insight into the why and how of your company’s revenue. Failing to include them can result in missed metrics like a high churn rate hidden by high growth. Accuracy is essential when calculating MRR. Failing to include all MRR components can lead to false figures or errors.
5. Treating MMR as an accounting figure
MMR is only a business insights figure meant to track growth trends and show you where revenue growth comes from. It’s different from accounting figures and terms like billings, bookings, and deferred revenue. Accounting standards don’t recognise MRR, and you shouldn’t use it for tax or accounting purposes.
6. Excluding discounts and coupons
Including the total amount of a plan when customers buy with a discount will inflate the revenue. Discounts, coupons and other offers reduce the value and income from that customer in a tangible way that you must consider when calculating MRR. You must subtract the discounted amount from the original price before including it in the MRR figure.
MRR analysis can help you discover different revenue opportunities in subscription-based businesses. It can help determine which customers to target for upselling, down-selling, or cross-selling opportunities.
The recurring revenue model makes financial forecasting much easier, and MRR analysis provides you with data to build a financial model that forecasts how much revenue you’ll generate in future at your current pace.
MRR analysis can also answer vital questions like:
Is your business contracting or growing? How much deferred revenue can you use to drive further growth?
Why is your recurring revenue decreasing or increasing?
What is a good MRR for a SaaS business?
What you consider a good MRR may be subjective depending on the stage of your SaaS business, the industry, pricing, and other factors. MRR benchmarks for SaaS can help you determine where your MRR stands compared to other companies. You can find various companies that share their numbers publicly.
Open Benchmarks at Baremetrics can provide you with some insight. They feature over 800 Startups and show MRR benchmarks based on the average revenue per user (ARPU).
How do I include annual contracts in MRR?
To include annual contracts in MRR, you must divide the total contract amount by the number of months the subscription is for. It allows you to get a monthly figure instead of adding the entire annual lump sum into the MRR calculation.
For example, if the annual contract figure is £2,400, you should divide this by 12 and only include £200 in your MRR calculation over the next 12 months unless the customer cancels the subscription.
How to increase MRR
You can increase your overall MRR by setting monthly recurring revenue goals that improve the different types of MRR. Strategies you can use include:
Getting more customers
Getting more customers through marketing or sales is a straightforward way to improve New MMR.
Upselling Existing Customers
You can improve customer Expansion MRR by focusing on your existing customers and getting them to pay more.
Winning back cancelled customers
Knowing why customers churn and following up with them is an excellent way to improve your reactivation MRR.
Making your customers successful
Most times, cancelled subscriptions and customer downgrades result from a lack of value in the current plan. You must ensure your customer gets enough value from the current subscription model to justify the price. You can educate them on how to get the most from your product, which improves Contraction MRR and the overall MRR growth rate.
Monthly Recurring Revenue (MRR) FAQ
What does MRR stand for?
MRR stands for monthly recurring revenue.
What is an MRR quota?
The MRR quota is the set MRR goal the sales team is required to meet in a particular period. It’s meant to improve the performance of the sales team.
What MRR do I need for an exit?
The MRR you need will depend on whether you’re exiting pre-revenue or after getting established. It can range from zero to millions.
What is the difference between Annual Recurring Revenue (ARR) and MRR?
ARR predicts how much revenue a company can generate yearly from its customers, while MRR predicts the revenue it can generate monthly.
How do you calculate monthly recurring revenue in SaaS?
The formula for calculating MRR is:
MRR = number of subscribers in a monthly plan X monthly ARPU
Is MRR recognised revenue?
No. MRR only provides a picture of how your business is doing financially and is not recognised by accounting standards.
Monthly Recurring Revenue is a vital metric for SaaS and subscription-based businesses. When you measure and analyse it, you get quick insights into how your business is doing, stay on top of the information your investors care about most and make smarter business decisions that guarantee your success. It also helps you track other metrics essential to subscription businesses, like customer behaviour.
Sam founded his first startup back in 2010 and has since been building startups in the Content Marketing, SEO, eCommerce and SaaS verticals. Sam is a generalist with deep knowledge of lead generation and scaling acquisition and sales.