For subscription-based businesses achieving consistent and predictable revenue growth is the holy grail. In fact, monthly recurring revenue (MRR) is one of the most important metrics subscription businesses should be aware of. In this article, we’ll explain what MRR is, how businesses calculate MRR, and how to improve your monthly revenue for sustainable long-term growth. Let’s get started.
TL;DR
- MRR is the average revenue that a company expects to receive each month. There are some important variations to MRR that would be good for your sales team to be aware of, including new MRR, expansion MRR, and churn MRR.
- MRR is an important metric for SaaS businesses to track to understand business health. It can help forecast future revenue, keep on top of performance of various customer segments, and measure customer retention and churn.
- To improve your MRR, focus on expanding revenue from existing customers, reducing churn, and improving customer retention.
What is Monthly Recurring Revenue (MRR)?
MRR is the average revenue that a company expects to receive each month, or the recurring income businesses generate from existing customers. However, it’s not the same as total revenue (which includes one-time purchases). Let’s say you ran a CRM business where you charged your customers $1000 a year over 12 monthly payments. If you had 20 current customers on your yearly plan, you’d have an annual recurring revenue of $20,000, or an MRR of $1,666.
How To Calculate Other Types of MRR
Now, while the above is the most basic form of MRR, there are some important variations to MRR that would be good for your sales team to be aware of. They can provide extra nuance into your company’s growth, helping you really understand why your MRR increased or decreased over a certain period of time.
New MRR
This is the MRR your company generates through new customers that’ve signed up for your service or product. If you had 10 new customers sign up for a monthly plan at $50, you’d have a new MRR of $500 ($50 x 10 new customers).
Expansion MRR
The expansion MRR calculation looks at the additional MRR you earn from existing customers that upgrade, purchase add-ons, or otherwise increase their LTV without any CACs. It’s calculated as a percentage rate compared to the previous month, allowing you to see how much more of your offerings your customers are buying. So, let’s say you had $1,000 in expansion MRR in May and an expansion MRR of $2,000 in July, you’d have an expansion MRR rate of 100%.
[($2000-1000)/$1000] x 100 = 100%
Churn MRR
The churn MRR calculation shows you the MRR your company loses out on when customers cancel or downgrade their subscription. While you could just look at the total monthly revenue you’re missing out on, we recommend looking at it as a percentage rate.
So, if your SaaS made $5,000 in recurring revenue in one month, but lost $700 in downgrades and contract cancellations, you’d have a churn MRR of 14%.
[($700 / $5,000)] x 100
Net New MRR
This MRR calculation offers the best possible view of your recurring revenue; it takes into account not just your revenue, but also relevant MRR components like downgrades and cancellations, allowing you to get a more holistic view about your company’s overall growth and long-term business health.
You can calculate it using this formula:
(New MRR + Expansion MRR + Reactivation MRR) – (Churn MRR + Contraction MRR)
Now, if you had $5,000 of new MRR, $500 in upgrades, and $400 in reactivations, but you had a churn of $1,000 and $500 in downgrades, your net new MRR would be $4,400.
You can also determine your net new MRR growth rate by subtracting the net new MRR of the previous month from the current month’s net new MRR, divide it by the former, and multiply it by 100.
Why MRR Matters for SaaS and Subscription Businesses
MRR is more than just a random number sitting in a dashboard somewhere; it’s critical to understanding your business health. Here’s why:
- It can forecast future revenue and provide customer insights: Unlike one-off sales, monthly subscription-based revenue can provide more reliable insights into financial performance by tracking growth over time. If you have a stable MRR and annual recurring revenue, you can derive actionable insights for cash flow projections, hiring decisions, product development, etc.
- MRR can measure performance of various customer segments. For example, you can figure out which segments you should target sales efforts on, or track the amount of time customers use your service, and then determine what factors can improve those numbers.
- It helps with measuring customer retention and churn: While MRR is important on its own, using it to understand other metrics or in combination with these metrics makes it all the more valuable. A lower MRR metric means your LTV is decreasing, which could be caused by subscription cancellations, while an increase in your MRR can signal growth. It can also be used to calculate the customer acquisition cost (CAC) and gross margin.
How To Improve Your Monthly Recurring Revenue
At the end of the day, SaaS companies need to become profitable, and that requires more revenue. Here are some of the key ways you can scale your MRR.
- Increase customer acquisition: To do this, focus on enhancing your lead generation and conversion strategies to bring in more customers. Carefully evaluate your marketing funnel to see how streamlined the process is, and use data-driven marketing (and/or re-targeting) to maximize your acquisition efforts to bring in high-quality leads with a high LTV.
- Expand revenue from existing customers: It can cost up to 7 times as much to acquire a new customer than to increase your MRR from a current customer, which makes upselling and cross-selling more cost-effective alternatives. Upselling is when you offer customers a higher-priced product or service, while cross-selling is for an additional product or service. Just make sure you truly add value for your existing customers and focus on customers with a higher LTV.
- Reduce churn: When customers churn (which is inevitable!), get some feedback on why they’re leaving and brainstorm how to combat those factors for future customers. Offer incentives for long-term commitments, and reach out to at-risk customers to keep them in your ecosystem as long as possible.
- Improve customer retention: Finally, proactive customer service, streamlined onboarding, a valuable customer loyalty program, and great products and services are surefire ways to keep your customer retention rates up. That way, you’ll have consistent MRR from existing customers for the foreseeable future.
Common Pitfalls to Avoid When Calculating MRR
Misinterpreting your MRR can lead to poor decision-making from inaccurate data. Here are some mistakes to avoid:
- Counting one-time payments as MRR: One-time fees, like set-up charges, or non-subscription purchases don’t fall in recurring revenue, as you can’t rely on these payments each month. Make sure you exclude them from calculations.
- Not accounting for downgrades and churn: Keep track of lost revenue from any downgrades or cancellations; otherwise, you’ll have an inflated and inaccurate picture of your financial health.
- Ignoring expansion revenue opportunities: Increase your average revenue by actively upselling and cross-selling; if not, you’re likely missing out on potentially significant amounts of revenue.
The Stax Solution
Implementing MRR-based insights doesn’t have to be difficult; in fact, we’ve streamlined the process.At Stax, our industry-leading payment processing solutions offer multi-payment support, integration capabilities, and a powerful dashboard with analytics that will help you optimize your growth strategies and supercharge MRR growth. Contact us today to modernize your SaaS company’s payment technology and start monetizing payments.
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