As your business begins to make money, you will become reliant on several key metrics to run your SaaS business successfully. One key metric that you will often come across is MRR or Monthly Recurring Revenue.
MRR is income your business can account for every 30 days (monthly period).
One of the purposes of MMR (Monthly Recurring Revenue) is to allow you to track performance across your business monthly subscription terms.
Many Business-to-Consumer (B2C) businesses follow this model for their organization. Let’s take Netflix as an example. Netflix offers various plans that are all month-to-month.
Now let’s take a look at a physical business such as Primitive Reserve. Every month skateboarders have the ability to purchase a box for a monthly fee. While this example is not a software solution it does offer a monthly plan which their business can use to track at any given time.
MMR provides contract revenue normalization, allowing you to measure performance accurately. By understanding how to utilize the MMR metric best, you are able to track your company’s growth.
MMR is best used to monitor:
- New contract growth, regardless of term length
- Net gross expansion
- Net gross contraction
- MRR cohorts
MMR should also be used to assess your average selling price, calculate CLV (Customer Lifetime Value), and estimate your future GAAP (Generally Accepted Accounting Principles) revenue. MMR is the metric that provides a true picture of your subscription business.
Annual Plan = $900 per year Monthly Plan = $75 per month
Let’s say that you have five subscribers who sign up for the annual plan in January, and you have five subscribers who sign up for the monthly plan. Your revenue in January is $4,875.
In February, you have no new subscribers (unlikely, but we’ll use it for the purposes of this example). Your monthly revenue is $375, or 5 x $75. When you compare January to February, it appears as though your revenue has declined. In reality, your business is stable because you still have the same number of customers. This can lead to skewed data if not captured correctly. You can see how traditional calculations do not give you a true picture of how your company is performing. MMR, on the other hand, will give you more accurate numbers.
Calculating your MRR is easy if you know the formula. To calculate for MRR, you must consider the monthly duration. So, as per the example above, your annual subscription is broken down to $75 per month for each subscriber.
If you simply offer plans for your service, MRR calculations are fairly straight forward. If, on the other hand, you offer a combination of one-time and recurring charges, you should first understand what to include in your MRR calculations and what to exclude.
|Recurring plans||Any set-up fees charged|
|Recurring add-ons||Add-ons that are not recurring|
|Adhoc charges that are non-recurring|
Using what you have learned and the examples, let’s calculate an MRR.
$50 per month $30 recurring add-on $50 non-recurring add-on Discount of $10 per month
Total invoice: $120
MRR for the subscription: $70
Do you see the difference? The MRR is calculated using 50 + 30 – 10 = 70. You do not include the non-recurring add-on.
As your business continues to grow, you will want to know what your current MRR is and you will want to know what your new MRR is going to be for the following month.
Understanding where your new MRR is coming from can help you focus your business practices. Marketing, advertising, and upselling strategies can be tailored based on where your new business is coming from.
To calculate new MRR, you’ll use three elements:
- New MRR
- Expansion MRR
- Churn MRR
New MRR comes from your new subscribers. Expansion MRR is the revenue that you gain from existing customers in the form of upgrades or upsells. Churn MRR is the revenue that you lose due to cancellations and/or downgrades to service.
Add these three elements together and you come up with your net new MRR. Why do you want to bother with this calculation? Because you gain a better insight into where you are earning money and where you are losing it.
What you ultimately want is for your expansion MRR to outweigh your churn MRR. How you accomplish this is up to you. The suggestion is, obviously, to get your current customers to upgrade to new recurring services. A one-time add-on won’t affect your net MRR.
When it comes to running your business successfully, metrics are important. Until you really get your feet wet, choose a few to concentrate on, and make sure that MRR is one of them. When you understand MRR and how to calculate it, you gain the knowledge you need to grow your company.