MRR – Monthly Recurring Revenue

MRR – Monthly Recurring Revenue
In this article we would like to address the topic of “Monthly Recurring Revenue”, often simply called MRR. This is a passive and plannable source of income that occurs primarily in business models of the subscription economy. But what exactly do such models look like and how are they calculated?

Monthly Recurring Revenue – a definition

MRR - Monthly Recurring Revenue
Simply expressed, Monthly Recurring Revenues (MRR) are revenues that a company can count on every single month – in other words, a predictable income. It is a single number (Key Performance Indicator; KPI for short), that can be used to track all recurring revenue over time in monthly steps. Often this is a byproduct of a subscription business – a service that is billed (and paid) monthly.

Monthly recurring revenue as a KPI is the most important metric for subscription businesses, arguably – and something investors are keen to see. MRR forms the basis for the following financial approaches:

  • Calculation of the CLV (Customer Lifetime Value)
  • Projection of future sales
  • Evaluation of ASP trends (average sales price)

The definition of monthly recurring revenue can be broken down as follows:

  • New MRR: ‘New MRR’ shows revenue generated from new customer acquisition.
  • Expansion MRR: ‘Expansion MRR’ is all about up-selling and cross-selling. The ability to generate higher revenue from an existing customer base is key to a successful subscription business.
  • Churned MRR: This is revenue lost due to customer churn, i.e. customers who cancel or do not renew their subscriptions.
  • Net New MRR: Revenue added after deducting cancelled contracts. It is calculated: Net New MRR = New MRR + Expansion MRR – Churned MRR.

MRR and Subscription Economy

 Subscription businesses with monthly recurring income operate in a way that is fundamentally different from traditional businesses. With a monthly recurring revenue model, businesses typically manage customers and their subscriptions as they evolve over their lifetime from free or entry-level services to premium offerings. The aim here is always to motivate the customer to buy, update, or renew a subscription. The customer is thus at the center of a subscription business, so key performance indicators (KPIs) are more often about customers than about products. In addition to MRR, key customer-centric metrics include total active customers, total active subscriptions, and total contract value (TCV).

But how can I measure and track Monthly Recurring Revenue? For a few customers, a Google Doc or the good old Excel list might be enough. But with several thousand customers, a subscription management software is quite useful. It is possible to monitor new registrations, acquisition costs, Cashflow, churn and much more. Additionaly it also makes it possible to scale your business by answering the following question: How many customers do I need to reach my revenue target? Or: How high should the price be to reach my sales target with XY number of customers? 

 How is the MRR calculated?

 To calculate your monthly recurring revenue, simply multiply your total number of paying users by the average revenue per user (ARPA). This gives you a meaningful KPI that makes it easier for you to plan and predict revenue goals.

Example:

Monthly Recurring Revenue = Number of active customers x Monthly turnover (or subscription price).

So, assuming you have 1.000 customers and only offer one tariff, say 25 euros monthly, you have an MRR of 25.000 euros.

Nevertheless, Monthly Recurring Revenue is neither a FASB (Financial Accounting Standards Board) nor a GAAP (Generally Accepted Accounting Principles) defined term, so there are no rules or insights to help define the calculations for the various MRR components required to track the following business processes:

  • Monthly recurring revenues from renewals
  • Monthly recurring revenue from new sales
  • Monthly recurring revenue from upgrades
  • Monthly recurring revenue from losses or downgrades, commonly referred to as revenue churn.

Still, modern SaaS tools can help you get an overview, such as a summary without the detailed line items of each category.

 Monthly recurring revenue – the conclusion:

 The MRR is one of the most important key figures for subscription or SaaS companies, but can be applied differently on an individual basis, depending on the focus and product offering. Thus, the conclusion of the contract often also takes place free of charge for the customer, since the focus is on premium or upgrade users and thus the monthly recurring revenues are tracked with a corresponding delay. In summary, there is not only one MRR definition, instead it is an individually designable assistance for calculating and scaling the monthly revenues.

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in Wiki: Key figures & KPIs