Monthly Recurring Revenue (MRR) is the amount of money a business gets from its subscription customers, recognized on a monthly basis. Any business is interested in how much revenue they generate each month, but not every business has a recurring revenue model.
A recurring revenue model is one where the customer pays in installments over the period of a contract; or where they pay once (usually at the start of the contract term) but for financial reporting purposes, the revenue is recognized at intervals over the duration of the service.
Subscription business models, used by most SaaS companies, are the best example of a recurring revenue model. As such, MRR is a key metric in SaaS.
MRR is important to a SaaS business for two main reasons. Firstly, it is an indicator of growth or contraction on a short-term (i.e. monthly) basis. Secondly, it is a predictor of future revenue, and so a key input for projecting cash flow and profitability.
Though MRR is an important metric for every SaaS business, some prioritize it more than others. A startup targeting rapid user growth may, for instance, be willing to forgo revenue (and so MRR) in the short term.
Likewise, a company that is looking to diversify into new services may take a hit on their MRR as they focus away from their current subscribers to new ones. While for established SaaS businesses with a stable subscriber base, MRR will be a key metric of success.
MRR is not a ‘Generally Accepted Accounting Principle’ (GAAP) metric, and so there is no single way to calculate it. The most straightforward way to calculate MRR, though, is the monthly value of a subscription multiplied by the number of subscribers.
500 customers, paying $10 per month = an MRR of $5,000
50 customers, paying $750 per year = an MRR of $3,125
That’s fine if all your customers are on exactly the same subscription. But that’s never the reality. Even a mid-sized SaaS company can have thousands of customers across multiple products and changing price points. So a more accurate way of working out MRR is to total the monthly revenue of each customer. But that can be impractical, for the very same reason.
A standard compromise is to normalize the monthly revenue of all your subscribers first. In this approach, you multiply the monthly Average Revenue Per User (ARPU) by the number of subscribers.
Like many other SaaS metrics, MRR has variations. These can be expressed as actual financial numbers, or as percentages (compared to the month before) to show rates of growth or decline.
Annual Recurring Revenue (ARR): ARR is the same as MRR, but with revenue measured over a year rather than a month. They are often used together, as ARR is able to smooth out short-term fluctuations in MRR due to isolated events to show more accurate longer-term trends. ARR is also important when you’re selling multi-year contract terms.
New MRR: The MRR from only your new subscribers. When put against Customer Acquisition Cost (CAC) it will show the profitability of your new subscribers.
Expansion MRR: The additional MRR generated from existing subscribers, usually as a result of an upgrade or renewal at a higher price. Typically this does not include subscribers who converted from a free trial, as these would be counted as new MRR.
Reactivation MRR: The monthly revenue earned from previously churned or canceled subscriptions that are reactivated during the month.
Contraction MRR: The total reduction in MRR due to downgrades and subscription cancellations compared to the previous month. When expressed as a percentage, this is known as ‘Churn MRR’.
Net MRR: The combination of New, Expansion, Reactivation, and Contraction MRR. This gives an overall picture of how MRR is changing. MRR often begins with Net MRR, before digging into its constituent parts. When expressed as a percentage, this is known as ‘Net Revenue Retention’.
Like all SaaS metrics, benchmarking MRR can be difficult as performance varies by markets, customer demographics, and stage of business. Here are some helpful guides.
(All data source: KeyBank SaaS Survey Results 2019)
Most standard measurements of MRR only take into account committed revenue - that is to say, money that the customer has already spent on their subscription and is being recognized on a monthly basis, or the money they will spend each month for their subscription for the duration of their contract term.
But looking at MRR in isolation can be misleading. It’s important to understand the context.
For example, not every customer starts off paying full price. Some will be lured by a discount period, while at the other end loyal customers may be rewarded with the same. And it’s not uncommon for disgruntled subscribers to be sweetened by a temporary halt on their payments. All of this will reduce MRR in the short term, but for good reasons.
Or things can go the other way. SaaS businesses can make money outside of subscription revenue; A subscriber may make a one-off purchase, like the cost of setup, technical support for an incident, user training, or new feature enablement. MRR would not include any of this revenue, but they are clearly contributors to and measures of revenue growth.
Another consideration for calculating MRR is when in the month you recognize the revenue. For annual or multi-year subscriptions where revenue is being recognized monthly, a SaaS business has control over what day that happens. But where customers pay on a monthly basis, the billing date is normally determined by when the customer took out the contract. So revenue will be recognized all through the month, meaning your MRR will fluctuate depending on what day you assess it.
It’s never a good idea to look at any SaaS metric by itself. By combining MRR with other SaaS metrics, you get a more complete picture of business performance. Here are three metrics that are closely tied to MRR.
Customer Lifetime Value (CLV): CLV is the revenue (or sometimes profit) you can expect to receive from a subscriber over the course of their custom. It is predictive, and therefore can be a complex calculation, depending on what variable you use to define ‘value’. Using MRR as that value should provide a more accurate result.
Churn: As we have already read, ‘MRR Churn’ is a key variable of MRR analysis. But by also putting simple churn side-by-side with basic MRR, you will see patterns between subscriber numbers and revenue. Typically you’d expect high churn to result in falling MRR. But sometimes MRR can rise on the back of lower subscriber numbers if those remaining customers are paying more. This can be a useful test of the price elasticity of your product. Likewise, stable churn and improving MRR (with no price increase) is a signal that your customers are upgrading or expanding their subscription with you, which may negate spending on new customer acquisition. Read more about MRR and churn.
Net Revenue Retention (NRR): NRR (sometimes known as Net Dollar Retention - NDR) takes recurring revenue a step further, by taking into account current customers who downgrade, pause or reduce their consumption alongside those who churn. NRR is expressed as a percentage, with anything under 100% showing revenue contraction. It is an important predictor of how much your business could continue to grow from your current customer base alone. The adoption of NRR as the key recurring revenue metric marks a shift in SaaS strategy from growth at all costs to sustainable growth.
Whichever way you decide to measure MRR, getting it moving in the right direction is the key. Here are some of the tactics that SaaS companies employ to grow their MRR.
Nothing kills MRR growth like churn. Though some churn is unavoidable, especially in a high-growth stage when you’re targeting quantity of subscribers over quality, you can reinforce the value of your product to persuade customers who are thinking of leaving to change their mind.
To achieve this, you need a great product and customer service, combined with customer communications that highlight the key benefits of your product. If you need to, you could even offer discounts and incentives to stay in order to keep hold of more revenue in the long term.
A renewal in itself won’t grow your MRR, but it provides the stability to grow from. Legally you have to ask a subscriber if they want to stay. But there are different ways of asking. Early is often best, so you can deal with any objections in plenty of time. You can also presume customers want to stay in your communications with them by asking a subscriber to actively opt-out of your service, rather than asking them to opt-in again.
Setting the right price for your product is not an exact science. Some prospects will always find it too high, whereas others would be willing to pay more. Continually testing different price points will get you closer to the sweet spot where you're maximizing MRR.
No SaaS business can keep raising its prices and get away with it forever. But hitting that ceiling doesn’t mean new revenue has to dry up. Introducing tiered packages - where your customers pay incrementally to access more of your service, or usage-based pricing based on the number of users and how much they are consuming - creates a scalable revenue model. And when you have that, make it easy for your subscribers to access the next level of service.
Whether a customer is upgrading, renewing, or joining, don’t lose them at the last minute. An often overlooked part of the subscription journey is the checkout stage. Pre-populated forms, a choice of payment methods, and localized language and currencies can all play a part in a frictionless upgrade. But it’s a balance - some friction for security protocols can provide the confidence to see the transaction through.
Whereas effective marketing and a product-led growth strategy can build MRR by adding new subscribers, sometimes the big wins come from targeting existing accounts that have more budget to spend. Identifying these can be as simple as comparing their current spend with you to their relative spending power. A dominant brand generating a low MRR could be ripe for expansion. Look at usage - be it people, time, or compute - to identify subscribers that are becoming more reliant on your product. Depending on the size of the opportunity, it may be better to navigate these targets away from your automated upgrade flow and have offline conversations with them to negotiate a bespoke (and more profitable) package.
Each of these MRR growth tactics should be measured individually to understand which are working well and where to direct attention and budget.
With so many factors impacting MRR, it can be hard to keep on top of it all. A revenue delivery strategy - and the right infrastructure to power it - is the answer.
Revenue delivery is a strategy for accelerating growth across customer acquisition, renewals, and expansion by optimizing the journey your earned revenue takes. This includes how orders are taken and processed; how customer records are maintained; how users are onboarded, supported, and billed; and what’s required to stay on the right side of financial and legal regulations.
Traditionally these activities have been viewed independently, with SaaS companies using different tools for each. But this contrasts with the holistic nature of MRR, and how it is a function of many moving parts.
Therefore a unified revenue delivery platform is a more logical way to go about managing and measuring MRR. Learn more about how to grow your MRR with Paddle’s unified revenue delivery platform.
Learn how we can help you run and grow your software business with Paddle. Get in touch with the Paddle team today.
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