For any business owner, especially those who run subscription-based SaaS businesses, MRR is an important metric. To know whether your business is growing or declining, keeping a close eye on your MRR is crucial. Moreover, even the slightest mistake in calculating MRR can prove to be costly for you and your business.
Therefore, you should make it a priority to accurately measure MRR. To avoid mistakes when calculating your monthly average recurring revenue, read this article.
What is MRR?
Monthly Recurring Revenue (MRR) is your company’s monthly average recurring revenue. This metric covers subscriptions charges, service agreements, and other recurring fees but excludes one-time charges like setup fees. The Monthly Recurring Revenue Formula is calculated using ARPU and the number of Active Customers.
How to calculate MRR?
In the Monthly Recurring Revenue formula, ARPU is multiplied with the total number of active customers.
MRR = Average Revenue Per User (ARPU) x Number of Active Customers
To understand this in a better way, let us consider the following example of a business. The below-given table provides the information about some of the customers and their monthly average recurring revenue–
The MRR for this company according to the monthly recurring revenue formula will be –
ARPU x Number of customers
= 78.75 x 4 = $ 315 (MRR)
For businesses that use Stripe, this type of MRR is computed automatically based on the details of monthly subscriptions set up inside Stripe. It is vital to note that MRR may not be equal to the total amount of revenue collected in a month. This is because MRR is a forward-looking statistic that only takes into account the predictable and recurring revenue. As a result, you may find that MRR might be less than the total dollar amount of income generated in any given month.
What to keep in mind while calculating MRR?
Usually, companies that employ an enterprise sales strategy model integrate metered billings, long-term subscriptions, discounts, and taxes into MRR. Due to these inclusions, these types of businesses may discover complications when calculating MRR. Such complications arise because metered billing is quite prone to deviations. Therefore, popular sources like SaaStr's Jason Lemkin and Stripe recommend excluding metered billing from any monthly recurring revenue formula.
Long-term contracts, such as multi-year subscriptions, should be amortised every month to get an accurate MRR. Amortisation will improve accuracy even if the cash payment is not made monthly.
Why MRR is important?
As MRR considers the ARPU (average revenue per customer) for subscription-based SaaS businesses, it is reasonably stable and predictable. Therefore, it becomes relatively easy to generate financial projections using MRR. So, MRR is a critical measure of a SaaS company's success. The month-over-month increase in percentages of MRR will show if you are on the right track.
How to improve MRR?
Now that you have a fair idea of what MRR is and how critical it is for your success, let’s take a look at how to improve it for your business.
- Reduce your churn rate - Churn is unavoidable for SaaS businesses. When your churn rate is high, it not only cancels out the gains from new consumers but also makes it incredibly difficult to achieve long-term growth. If you can reduce your churn rate, you will see an increase in MRR. Therefore, try to keep your churn rate to a minimum.
- Do not ignore lost customers - Just because a customer cancels their membership does not mean they are no longer with the company. If you can re-engage those clients and find a way to win them back, you can increase your MRR.
To achieve this seemingly tricky feat to win back old customers, try to find out why consumers cancelled their subscriptions and follow up with them with an appropriate sales strategy.
- Get more customers - Having more monthly customers will help you to increase your MRR. Especially if you are a new company, this method will be the most effective to impact your MRR positively. Although this may sound pretty simple, sometimes, it can be the most challenging. So, having a carefully planned sales and marketing strategy will be beneficial.
Start maximising your MRR
MRR is an important metric that will help you analyse your company’s growth month over month. Keep an eye on your MRR projections and tweak your marketing strategies to acquire more customers and more average recurring revenue from existing customers to power your business growth.