As the bread and butter of subscription-based companies, monthly recurring revenue (MRR) is the predictable amount of revenue you can consistently expect to receive on a monthly basis. You may be thinking, when should I use annual recurring revenue (ARR) vs. monthly recurring revenue?
Simply put, ARR is the annualized sum of your MRR, and many subscription-based companies calculate both. This helps to gain a long-term view (ARR) of the business’ financial standing, as well as to measure month-over-month (MRR) growth or decline. However, there are a couple of caveats. Although MRR and ARR go hand-in-hand to gauge financial health, large enterprise subscription-based companies that only offer annual contracts will use ARR. Alternatively, software-as-a-service (SaaS) businesses that provide subscribers with the option to cancel their annual subscription before the end of the term or small and medium-sized businesses (SMBs) will use MRR.
How to Calculate Monthly Recurring Revenue
There are a few ways to calculate your recurring monthly subscription revenue. The formulas you choose will depend on the metrics you desire. Let’s take a look at some of the most common monthly recurring revenue calculations, starting with the most basic.
If you have 20 subscribers each paying $200 per month, your monthly recurring revenue would be $4,000 (20 x $200 = $4,000).
Let’s now assume that in addition to the 20 subscribers paying $200 per month, you also have 10 subscribers paying $150 per month. Your monthly recurring revenue for the 30 subscribers would be $5,500 (10 x $150 = $1,500 + $4,000 = $5,500).
Net New MRR
This metric consists of revenues collected from new subscribers and upgrades, as well as revenue lost due to downgrades or churn/cancellations. For example, during the month you gained 5 new subscribers paying $100 each per month, and 10 current subscribers upgraded their plans from $100 per month to $200 per month. However, 3 subscribers that were paying $200 per month churned. Your net new monthly recurring revenue for that month would be $900 (New subscribers + upgrades – churn).
This simple calculation determines the amount of revenue lost due to subscriber cancellation. If you started the month with $20,000 in revenue, but lost $1,000 due to churn, your churn rate would be 5% (lost revenue / total revenue x 100).
When a customer cancels a subscription but at some point returns, you can quickly calculate your reactivation monthly recurring revenue. For example, let’s assume 6 subscribers returned each purchasing subscriptions for $100 per month. Your reactivation monthly recurring revenue would be $600 (6 x $100 = $600).
These calculations provide a baseline to help you understand the sustainability of your SaaS company, determine achievable goals, and measure the business’ growth or decline. However, you may decide that other metrics are needed to provide a more in-depth view of your business’ financial health.
Avoid Monthly Recurring Revenue Calculation Mistakes
As a critical financial metric, it’s imperative that your monthly recurring revenue figures are accurate. Let’s take a look at the 5 most common mistakes made when calculating MRR.
- Including non-recurring payments. Revenue received on a non-recurring basis, such as a one-time payment for an event you’re hosting shouldn’t be included in your MRR calculations.
- Including revenue at full value. If the full subscription payment 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 skewed. This is because you’ll show an increase of net new subscribers one month and a higher than normal level of customer churn a subsequent month.
- Including fees and charges. Whether transaction fees or payment delinquency charges, including expenses of this nature results in inaccurate and misleading MRR figures.
- Not 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. Say 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 calculation would reflect $75 per subscriber instead of $100.
As you can see, calculating monthly recurring revenue can quickly become complex and open to miscalculations. It’s also time-consuming – especially if your finance team is manually handling monthly recurring revenue processes.
Considerations Beyond Calculations
While all subscription-based companies have one thing in common (receiving revenue on a recurring basis), their pricing strategies may vary greatly which adds another layer of complexity in calculating monthly recurring revenue. Add in various promotional initiatives such as trials, vouchers, coupons and discounts; tracking what initially appeared to be simple metrics can quickly become convoluted. And that’s not all. In an industry that’s experiencing exponential growth, SaaS companies need to evolve and address emerging market needs to remain competitive. This typically means the addition or retirement of products, services and bundles, as well as pricing schemes.
Unlike one-off sales revenue models focused on acquiring a constant stream of new customers, subscription-based companies rely on customer retention. Delivering the experience that drives long-term customer loyalty takes flawless account management, timely and accurate billing and invoicing, and empowering customers to serve themselves.
Keeping on top of billing activities and ensuring that they are accomplished with speed and accuracy takes time and effort. Time and effort by your finance resources that are most likely already stretched. What if you could take the manual effort out of the billing processes that are fundamental for accurate monthly recurring revenue calculations?
Gain Complete Financial Control
You need a clear and accurate understanding of your financial standing, and shouldn’t leave anything to chance. This means avoiding costly errors and time-consuming manual tasks. BillingPlatform delivers an all-in-one solution that automates the entire quote-to-cash processes, allowing you to calculate monthly recurring revenue with precision and speed. Learn more about how BillingCloud gives you the power and flexibility to develop any type of billing model, and support even the most complex recurring revenue relationships.