Monthly recurring revenue (MRR) is the money you make every month from customers purchasing your products or services. This is the amount you can rely on receiving regularly. It is a key metric for businesses to track their financial performance. MRR helps businesses understand their revenue stream and plan for future growth. Subscription-based software-as-a-service (SaaS) companies commonly use it.
So why are monthly recurring revenue (MRR) metrics important to your business? First, let’s discuss how to calculate the different types of MRR. Then we can understand how these metrics help you drive business growth, better understand revenue trends, forecast future revenue and enhance the financial health of the business.
If your business isn’t subscription-based, does this make MRR insignificant? On the contrary… MRR quantifies a business’s predictable income from subscriptions or other ongoing services such as those offered by managed service providers (MSPs), value-added resellers (VARs), cloud service providers (CSPs), and channel partners.
Additionally, some commonly implemented recurring revenue models include per-user. Charges are based on the number of people using the company’s product or service. Breaking it down further:
- Per-device – where customers pay a fee based on the number of devices being serviced or managed by the company
- Per-cloud-based services – where cloud providers charge customers based on the type(s) of cloud services used
- Fat fee where customers pay a recurring amount for a plan or a product
Monthly Recurring Revenue: What it is, Why it’s Important, and How to Calculate
What it is
MRR isn’t recognized by accounting standards such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). It doesn’t need to be reported to tax authorities or government agencies, but it’s an important metric that needs to be tracked and frequently analyzed.
Monthly recurring revenue is a key metric that measures the predictable and recurring revenue generated on a monthly basis. While used by a variety of business models, MRR is most commonly used by subscription-based companies. With respect to subscription-based business models, this metric represents the total revenue generated from customers’ subscription fees, excluding one-time purchases, upsells, cross-sells, and additional services such as consulting, training or other one-time charges. Essentially, MRR consists of all recurring revenue normalized into a monthly amount.
Why it’s Important
MRR provides a way to average your pricing plans and billing periods into a single number that makes ongoing tracking easier and more consistent. This figure represents the total revenue generated for the month from active subscribers (excluding one-time purchases, upsell/cross-sells, additional services, and other one-time fees), enabling you to assess the current financial health of the business, obtain a clear view of your revenue stream, and more accurately project future earnings.
Before covering the various ways you can calculate MRR, let’s look at regular revenue calculations and why they may be misleading when used by subscription-based companies. The standard regular revenue calculation is to take the number of units sold and multiply it by the average selling price. This calculation doesn’t take into consideration annual subscriptions or subscription plan changes, which will result in an inaccurate view of the business’s financial health.
How to Calculate Monthly Recurring Revenue
There are a few ways to calculate MRR and the formulas chosen will depend on the metrics you are tracking. Here are some of the most common MRR calculations and the reasons for their use.
Basic MRR
The most simplistic of MRR calculations, MRR = the number of monthly subscribers multiplied by the average revenue per user (ARPU). For example, 20 subscribers paying $100 per month equals a Basic MRR of $2,000. (20 x $100 = $2,000)
Let’s now assume that in addition to the 20 subscribers paying $100 per month, you also have 10 subscribers paying $50 per month. Your Basic MRR for the 30 subscribers would be $2,500. (10 x $50) + (20 x $100)
New MRR
A metric that reflects the company’s ability to attract new subscribers, it consists of revenue generated from new customers during a specific period of time. For instance, during the month you acquired 5 new subscribers paying $100 each per month, your New MRR is $500. (5 x $100 = $500)
Churned MRR
This metric represents revenue lost due to subscriber cancellations during a specific month. Let’s assume 3 of your customers that were each paying $500/month cancel their subscriptions, your Churn MRR is $1,500. (3 x $500 = $1,500)
Upgrade MRR
This metric reflects the amount of revenue received from customers that upgraded their subscription plan or purchased add-ons during a specific month. If 2 existing customers upgraded their $50/month plan to the next tier ($100/month) and 2 customers purchase add-ons at $25/month, your Upgrade MRR is $250. (2 x 100) + (2 x $25)
Downgrade MRR
This MRR reflects loss of revenue resulting from customers that moved from a higher tier plan to a lower one over a specific month. Let’s assume that 2 customers downgrade their $100/month plan to a $50/month one, your Downgrade MRR would be $100.00. ($200 – $100 = $100)
Expansion MRR
Sometimes included within Upgrade MRR, Expansion MRR specifically relates to additional revenue generated when subscribers add new recurring revenue features or services to their plan. For example, let’s assume that your business has a MRR of $250,000 at the beginning of the month and throughout the month existing customers purchased $10,000 of features/services, your Expansion MRR growth rate for the month would be 4%. ($10,000 / $250,000) x 100 = 4%
Reactivation MRR
This MRR calculation determines revenue gained from churned customers that return to the business. Let’s assume you won back 6 subscribers and each of them purchased a $100/month subscription plan. Your Reactivation MRR would be $600. (6 x $100 = $600)
Contraction MRR
Contraction MRR includes downgrades, as well as subscription cancellations, subscription pauses, discounts, and the elimination of features/services. To illustrate, you award 10 of your long-term customers with a $25 discount for a specific month, your Contraction MRR would be $250. (10 x $25 = $250)
Net New MRR
This metric reveals how much your revenue has grown (or declined) during the month. If your Net New MRR is greater than the Churn MRR, your revenue will show an increase. Conversely, if your Net New MRR is less than the Churn MRR you would have lost revenue. To calculate, take New MRR, add to it Expansion MRR and subtract Churned MRR. Say during the month you acquire 2 new customers paying $100/month; 5 customers upgrade from a $50 plan to a $100/month plan; and 2 customers (each on a $100/month plan) chur. Your Net New MRR would be $250. (2 x 100) + (5 x $50) – (2 x $100)
While individually, monthly recurring revenue metrics provide diverse views of the business’s performance, it’s when you use the metrics in combination that you gain the insights needed to accurately forecast future revenue, measure the business for growth and scalability, make better estimates on customer lifetime value (CLV), refine your pricing and packaging strategies, know the business’s sustainability, and have the information needed for business valuation.
In addition to MRR, there is another key metric – annual recurring revenue (ARR). The question becomes – when should you calculate MRR vs. ARR?
When to Calculate MRR vs. ARR
While both MRR and ARR are key metrics in measuring revenue and are fundamental in assessing the company’s financial performance, they differ in their timeframe, calculation, flexibility, and comparability. For instance, changes in MRR can help identify which plans are driving the most revenue and which aren’t – providing the opportunity to quickly make adjustments. The longer term view provided by ARR provides visibility into the stability of the company’s recurring revenue stream, enabling the business to make informed decisions about growth targets and resource allocation.
To calculate ARR, you sum the total value of all annual subscription contracts and exclude one-time or non-recurring fees.
ARR = ARR from existing subscribers + ARR from new subscribers
When compared to MRR, ARR provides a longer-term view, providing for a better understanding of the company’s long-term revenue potential and stability. MRR, on the other hand, is a dynamic metric used for forecasting, benchmarking, evaluating sales and marketing effectiveness, and optimizing pricing and packaging strategies.
While both MRR and ARR provide a variety of metric types (see How to Calculate MRR), key differences include metric timeframe – annual vs. monthly; calculations used; and granularity where ARR provides a high-level view of the business’s financials. MRR provides a more granular view of the company’s revenue and enables increased flexibility, making MRR more responsive to changes and comparability. Essentially, ARR provides a stable and predictable measure of the company’s revenue. Operational and day-to-day management uses MRR.
Avoid MRR Calculation Mistakes
As a significant financial metric, it’s critical that your monthly recurring revenue figures are accurate. Let’s look at the 5 most common MRR calculation mistakes.
- Including non-recurring payments: Revenue received on a non-recurring basis, such as a one-time payment for an event, consultations, etc. shouldn’t be included in MRR calculations.
- Including revenue at full value: If the full subscription fee is received in advance, you can only use the monthly figure when calculating MRR. For example, if a subscriber purchased CRM software for a 12-month period and paid $12,000 for the year, your MRR calculations should consist of $1,000 for each month of the contract.
- Including free trials: By including the expected value of non-revenue generating trials in your calculations, your MRR will be inaccurate. This is because you’ll show an increase of net new subscribers one month and a higher-than-normal level of customer churn in subsequent months.
- Including fees and charges: Whether transaction fees or payment delinquency charges, including expenses of this nature results in inaccurate and misleading MRR figures.
- Including promotions: When providing subscribers with a promotion, the amount of the promotion needs to be subtracted from the actual subscription price for the duration of the promotion. Let’s assume you’re offering a discount of $25 on a $100 per month plan for the first quarter of the year. For the months of January, February, and March, your MRR would reflect $75 per subscriber instead of $100.
While monthly recurring revenue calculations appear straightforward, nuances can make calculations more complex and open to errors. For instance, pricing strategies and promotional initiatives such as trials, vouchers, coupons, and discounts increase calculation complexity. Additionally, this process becomes more error-prone and time consuming when manually handled.
On a Final Note
MRR, as well as ARR are critical metrics used to measure the company’s subscription revenue. Using and tracking the right metrics allow the business to paint a real-time financial picture and gain actionable insights for sustainable growth and profitability.
While there are a variety of monthly recurring revenue types, each one provides a different aspect as to the financial health of your business. When used in context with other metrics you have the information needed to better understand customer acquisition costs (CAC), CLV, gross margin, and more.
Tracking monthly recurring revenue manually can lead to errors, giving an inaccurate picture of the business’s financial health. This is why an increasing number of subscription-based businesses are swapping manual processes and legacy billing solutions for comprehensive and agile billing platforms.
BillingPlatform’s cloud-based billing solution provides everything needed to run your business with greater efficiency, accuracy, and control. With us, you get increased visibility into operational performance with customized reports to easily understand customer behavior (MRR, ARR, usage, CLV, churn, etc.), analyze performance, and have the accurate data needed to make informed business decisions. Contact our team to learn more.
