WHAT IS MONTHLY RECURRING REVENUE?
Monthly Recurring Revenue measures the amount of predictable revenue that is set to renew on a monthly basis. Having accurate figures not only helps you keep track of your monthly revenue, but also gives you an inside look at your company’s growth and help you predict your future sales.
WHY IS MRR IMPORTANT?
Having an accurate representation of your company's monthly recurring revenue is imperative. When it's incorrect you run the risk of misjudging your growth and making misguided decisions to improve your sales. Worse yet, having an inaccurate representation of your MRR puts you in a position of lying to investors.
A huge benefit of owning a SaaS business is seeing consistent financial projections from subscriptions, which is due widely to MRR being so easily predictable. The more months of recurring revenue you track, the easier it becomes to model your future months, predict your growth, track your downfalls, and make the changes to grow your business accordingly.
When your MRR is properly calculated you are empowered to take your company’s growth and momentum into your own hands, it gives you an accurate picture of where you are and where you’re headed.
CALCULATING MRR
Calculating your MRR sounds pretty straightforward (and for the most part, it is) but there are a few factors that come into play that make it a little more difficult.
Most subscription services offer their customers a variety of payment plans to choose from; for example, a monthly, quarterly, and annual subscription plan. 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 calculate your monthly recurring revenue between your monthly subscribers, and annual subscribers.
LETS 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. In this example we have 100 customers subscribed to each service. Our equation will look like this:
Monthly Plan = $50 / month x 100 customers = $5,000
Annual Plan with 10% discount = $50 / month x 100 customers * 10% = $4,500
Step 1. Break down the annual subscription into a monthly amount
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. And 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
Step 3. Calculate the monthly amount
Our last step is to find the monthly amount of all our combined customers and split it up over the course of the year.
$540 / 12 = $45
TROUBLESHOOTING YOUR MRR
As mentioned previously, while the calculation is relatively simple, there are some common errors that get in the way of accurate metrics. Why can it be such an egregious task to get the right numbers? Here are some factors that might be sabotaging your MRR.
Not breaking down annual contracts into a monthly ammount
When we looked at calculating MRR and putting it into a formula, one of the first things we did was break down our annual subscription into a monthly amount, before adding it to our monthly subscriptions.
A common, and understandable, mistake is to count those quarterly, semi-annual, or annual subscriptions that are one time payments, as a single payment for the month. While this makes sense when calculating your cash flow for the month, it gets in the way of the main function: 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 discounts
In our example one of the first things we did was break down our annual subscription into a monthly amount, before adding it to our monthly subscriptions.
A common, and understandable, mistake is to count those quarterly, semi-annual, or annual subscriptions that are one time payments, as a single payment for the month. While this makes sense when calculating your cash flow for the month, 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 the option for customers to make a one-time purchase. While this is a great option for your customers to try out a product or service and will potentially boost sales, these purchases aren't recurring and need to be excluded from the calculation.
Including any sales that aren’t recurring into your Monthly Recurring Revenue will inflate your revenue expectations therefore ruining your entire 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, a very common mistake is including trail subscribers and their expected subscriptions before they’ve made the commitment. This results in a higher than accurate number of net new customers and a higher amount of churned customers from all those trails that don’t convert.
ADDITIONAL INFORMATION
There are several variations, like Committed MRR (CMRR) and Contracted MRR. FirstOfficer shows Contracted MRR.
In addition to that, it's useful to split MRR to 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 following formula:
New MRR + Expansion MRR - Contraction MRR - Lost MRR = MRR Growth
Unless a different definition is used, the formula above stops working at plan level.
It's also worth to notice that different businesses have different definitions to what is considered Upgrade and Downgrade. 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.
Details, usage and formulas: Monthly Recurring Revenue
See also Recurring Revenue