Businesses that use a subscription model need to keep an eye on a number of important financial metrics, including their monthly recurring revenue (MRR).
MRR is a financial metric that measures a business’s normalized monthly revenue. It’s commonly found in businesses that offer various pricing plans for their products or services.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
Every subscription business experiences fluctuations in revenue as new customers sign up and others churn out. Your monthly recurring revenue perfectly captures the movement to show whether revenue is growing or shrinking and by how much.
This makes it easier for business owners, financial managers, and investors can gain insight into the financial health of the company and true earnings from normal operations. Monthly recurring revenue can also be used to accurately forecast expected future revenue so that you can make educated decisions about budgeting, investing, and scaling your company.
Monthly recurring revenue provides an average or normalized number for a company’s recurring revenue. It’s often used by software-as-a-service (SaaS) companies that generate their monthly revenue through subscriptions.
MRR isn’t recognized by accounting standards like IFRS or GAAP, but many investors will request to view a company’s MRR to evaluate its growth trajectory. Public SaaS companies will often include those figures in their quarterly and annual reports.
When it comes to evaluating your business performance and goals, there are other key metrics to consider apart from just monthly revenue.
You may want to monitor metrics, including your new MRR, expansion MRR, reactivation MRR, contraction MRR, and contraction MRR. These metrics measure lost revenue from canceled subscriptions and downgrades, revenue generated from upgrades or new customers, and other indicators of financial health and customer satisfaction.
New MRR (nMRR) refers to the additional revenue generated from new customers, products, or services during a specific time period.
Expansion MRR is used to measure additional revenue generated from existing customers due to an increase in their usage of a product or service, usually through upselling or cross-selling.
Reactivation MRR refers to the amount of revenue generated from customers who may have previously canceled or paused their subscription for a time before resuming payment.
Contraction MRR refers to the revenue that is lost when a customer cancels or downgrades their subscription to a product or service.
Churned MRR refers to the amount of revenue lost due to customers canceling their subscriptions. This churned number is an important metric that helps businesses understand how churn is affecting their overall revenue.
Monthly recurring revenue is calculated by dividing the total amount of revenue from all paying customers in a given month by the total number of customers. For example, if a company has 100 paying customers who each pay $20 per month for a subscription, the MRR would be $2,000 (100 x $20).
For subscriptions under annual plans, simply divide the annual plan price by 12 and multiply the result by the number of customers on the annual plan. For example, if ten customers subscribe to your service for $5,000 per year, the annual recurring revenue would be $50,000 and the monthly recurring revenue would be $4,167 ($50,000 / 12).
Net New MRR measures the increase in predictable revenue generated from new customer acquisitions over a given period of time.
To calculate Net New MRR, you need to:
The formula for Net New MRR is:
Net New MRR = New MRR – Contraction MRR
Let’s say the company has acquired 50 new customers in a specific month, each paying $20 per month. Five existing customers cancel their subscriptions in the same month. The New MRR is $1000 (50 x $20), and the contraction MRR is $100 (5 x $20). The Net New MRR for that particular month is $900 ($1000 – $100).
Different industries, maturity levels, and business models may have different benchmarks for measuring their MRR, which makes it difficult to define what constitutes a “good” MRR.
Generally speaking, a healthy MRR is one that demonstrates clear and consistent growth month over month, as it indicates that the business is steadily acquiring new customers and retaining existing ones. A company should aim to reach a positive net new MRR.
Most businesses aim for an MRR growth rate of anywhere between 10-20% month over month, but this number will certainly vary depending on the nature of the business. A start-up may experience high MRR growth rates compared to an enterprise company, but their cost of acquisition will be comparatively high, negating the value of their MRR.
As a subscription business, it’s in your best interest to keep growing your MRR. A growing number indicates that your business has accumulated a larger customer base that regularly pays for its products and services, which can attract new investors and assist the company with scaling its operations.
There are a few ways of growing this effectively, including:
If your business is underpriced, or if you’ve recently added new features or services, it’s time to increase your prices. You may see a small increase in churn, but the increase in MRR will justify the loss of a few price-sensitive customers.
You can boost your number by changing your pricing plans. Charging a flat rate is easy to implement and simple for customers to understand, but you could be missing out on revenue. Consider introducing tiered or usage-based pricing instead. There are several approaches to consider:
Per-user pricing is the go-to model for most subscription businesses. In this model, pricing scales along with the number of users. The more users are onboarded, the more you can charge. It’s easy for users to understand, which simplifies the sales process and revenue forecasts. The downside of this model is that users may share logins across teams. Per-user pricing also isn’t reflective of the value of the product.
Usage-based pricing is often used by telecommunications companies and IT service businesses. Users are charged according to how much of the product or service they consume, e.g., paying per GB of data used. This model helps users avoid high upfront fees, but you may deter heavy users. Implementing usage-based pricing can make it difficult to predict revenue as billing may vary dramatically from month to month.
If all of your features are currently available to all users in a single package, try splitting them into add-on services. Most customers won’t use every single tool or feature available to them; as long as the core value of the product remains the same, you can easily justify this approach. The few customers that need the added features will be willing to pay for them.
Free plans are designed to promote your business and raise awareness. If you need to boost your MRR, it may be time to abandon your free plan. You will lose a lot of your free customers, but if your solution is useful enough, most customers will make the switch to the paid plan. Alternatively, offer the free plan for a limited time only, e.g., offering the first month free before forcing users to upgrade to a paid plan.
You can raise your recurring revenue by removing unlimited pricing packages or maximum pricing. Instead, your pricing should always increase alongside the value it creates.
The recurring revenue model is often associated with Software-as-a-Service companies that offer software over the Internet on a subscription basis, like Zoom or Salesforce, but several other industries have adopted the model:
While the calculation itself is very simple, there are a few common mistakes you should try to avoid when you start working with MRR.
Bear in mind that this number is meant to be used to measure the growth and financial health of your business. Including non-recurring revenue, such as once-off setup fees, in your MRR calculation inflates your number and won’t provide an accurate picture of your growth rate. Only include payments that automatically recur until a customer cancels in your calculation.
It is not a figure that can be used for accounting or tax purposes. It’s designed to provide insight into the business and track growth trends. An investor may be interested in your MRR, but it won’t be the only metric they’ll examine. Make sure that you weigh your MRR against your cost of acquisition, billings, and deferred revenue when it comes to discussing your bottom line with important stakeholders.
While a percentage of trials and leads will convert in time and become part of your MRR, you cannot include those figures in your number. Even if your conversion rates are consistent, including your leads and trials in your MRR will only inflate the final figure to your detriment.
Don’t make the mistake of including the full value of a monthly subscription in your calculations when it comes to discounted customers. You need to take any discounts and special offers into account to gain an accurate picture of your MRR.
As a subscription business, you need to keep a close eye on your growth rates. By regularly calculating your MRR, you can gain insights that will help you focus your marketing and customer acquisition strategies in the right way.
If your MRR is declining, it’s time to focus your sales efforts on acquisition. If it’s stagnant, you should consider changing your pricing strategy. And if it’s increasing…well, you should keep doing what you are doing!
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
MRR is short for Monthly Recurring Revenue. It is a metric that measures the predictable and recurring revenue generated by a company’s customers on a monthly basis. It is a key metric for subscription businesses as it helps them predict future revenue and growth. It is the total revenue generated from all paying customers divided by the total number of customers.
An MRR quota is a sales target for Monthly Recurring Revenue that a sales team needs to generate within a particular time, e.g., quarterly. The quota is set by the company in order to measure the performance of the team towards the revenue goals of the company.
This number helps businesses operating on a subscription basis predict future revenue, track growth, and make informed business decisions. By monitoring your this rate, businesses can spot patterns and trends in their revenue and make strategic, data-driven decisions about growing their customer base or revenue.
There is no set figure that a business needs to reach before it can be acquired, as the number can vary depending on the industry, growth stage, and the acquisition strategy of the buyer. Generally speaking, businesses with a high MRR are more attractive to potential buyers, but it’s not the other factor they will consider when assessing a business for acquisition.
While MRR and ARR are both metrics used to measure predictable, recurring revenue over time, they measure this revenue on different timeframes. MRR measures recurring revenue generated by subscriptions on a monthly basis, while ARR measures recurring revenue on an annual basis. MRR can be used to make informed decisions on a short-term basis, while ARR is useful for identifying trends and patterns on a longer-time basis.
Related: ARR Guide: Definition, Formula, Examples, and FAQs on Annual Recurring Revenue
You can manually project your MRR by looking at your average revenue growth rate and revenue churn and plugging it into a formula, e.g., forecasting your monthly recurring revenue over a set period and summarizing the total.
Start with your current MRR and identify the key drivers of future growth, e.g., upsells, price increases, or a reduction in churn. Make a prediction of the impact of these drivers on MRR and then project the MRR for each month. Then, sum up the total MRR projected for each month.
Make sure to check your assumptions and adjust them if necessary to ensure that your projections are realistic and accurate.
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