Monthly recurring revenue (MRR) - an introduction
Monthly recurring revenue (MRR) is the primary metric to measure revenue of a SaaS or subscription business. Recurring revenue is a much more valuable revenue stream for management teams and investors as it's more predictable, creates more certainty for future revenues, and gives management teams and investors greater confidence.
What is MRR?
Monthly recurring revenue (MRR) is the total revenue in a month from customers that are subscribed to a repeatable product or services. If you have 10 customers each paying you £1,000 + VAT per month, your MRR is £10,000.
Why is MRR important?
MRR is typically the key financial growth metric management teams and investors want to know. The real value of MRR is that it will continue over a period of time. Extrapolating this value for a longer period than just one month is why investors place a much higher value over MRR. While there are other metrics that indicate the growth of a business, it all comes back to monthly recurring revenue.
Understanding MRR is fundamental for SaaS businesses or those whose revenue model operates on a subscription model, particularly in the early days. Strong MRR growth demonstrates the product or service is attractive, the market exists and that the business can scale.
MRR is generally the product of the number of customers (or accounts) in the month and the average revenue per account (ARPA). Calculating MRR takes into account all recurring elements of revenue: existing customers, new customers, upsells, contraction and churn. Looking at each area in detail, helps businesses identify strengths and weaknesses.
Do you have a lot of new business, but customers aren’t staying? Do you have great loyalty, but struggle to bring in new customers? Do you have a solid customer base and want to leverage those customers to make more money per customer?
MRR and growth
Calculating your MRR regularly can help you see how your recurring revenue changes over time and, crucially, how you can make sure it’s changing for the better. It’s useful for reflecting on:
- the impact of marketing efforts and gaining new logos or upselling existing customers
- changes in customer preference to higher or lower cost subscriptions, and
- identify MRR growth per customer, longevity and the impact of shaping customer decisions e.g. discounted longer subscriptions.
MRR and forecasting
You need to calculate your MRR regularly as MRR can be very dynamic.
Doing this can help you assess areas of opportunity within your current customer base and set goals accordingly and help analyse current performance against customer acquisition targets and churn rate to build a vision of future MRR.
MRR and seeking funding
While VC firms invest in relatively risky business models, they prefer to de-risk as much as possible. Business models with monthly recurring revenue are at an advantage as they give predictable and growing cashflows.
What does MRR look like?
How do you calculate MRR?
The formula to calculate MRR is:
MRR = opening MRR + new revenue – churn revenue + expansion revenue - contraction revenue
- Opening MRR: last month's closing MRR
- New: revenue from new customers
- Churn: lost revenue from churned customers
- Expansion: increasing value of revenue to existing customers
- Contraction: a contraction of revenue to the existing customer base
MRR worked example
If a company has MRR at the end of January of £100,000. During February the following revenue movements happened:
- New: £20,000
- Churn: £5,000
- Expansion: £2,000
- Contraction: £3,000
February MRR = £100,000 + £20,000 - £5,000 + £2,000 - £3,000 = £114,000
Conclusion
MRR demonstrates the health of a SaaS business. Its individual components allow a business to assess the impact of actions, identify opportunities and provide a key metric to investors. Management teams and (potential) investors will be focused on MRR and MRR growth to have confidence in the stability and growth of the business.
