Definition, how to calculate, ways to improve it in 2023

Table of Contents

What is MRR (Monthly recurring revenue)?

How to Calculate MRR?

Common Mistakes When Calculating MRR

Ways to Improve Your MRR

MRR Example

Types of MRR

What MRR Doesn't Measure


What is MRR (Monthly recurring revenue)?

MRR or Monthly Recurring Revenue is the amount of predictable revenue that a company can expect to receive on a monthly basis. MRR is arguably the most important KPI in understanding the overall business profitability and cash flow for subscription based companies.

MRR is used by SaaS and other subscription based businesses for two major reasons:
  1. Financial Modeling and Planning. In a SaaS business model, you're able to create accurate projections because of the recurring nature of payments. MRR is relatively consistent and predictable which makes forecasting and projecting future revenues easy.
  2. Measuring Growth. VC's and investors love to track the growth of MRR on a month over month basis. MRR is a key indicator of a growing SaaS business. When MRR is consistently growing month over month it can be one of the clearest indicators that the startup is headed for the moon.

How to Calculate MRR?

One of the simplest ways to calculate MRR is to take your Average Revenue per User (ARPU) on a monthly basis and then multiply it by the total number of users your company has in a given month. To simplify this even further (in cases where your business doesn't have any revenue yet) you can calculate a projected MRR by taking an average of your product offering selling prices and multiplying that by any given number of customers.

Monthly Recurring Revenue (MRR) = Monthly ARPU x Total # of Monthly Users

Calculating your MRR growth on a month over month basis can also be done by breaking down the above into "cohorts". Simply put you can divide this month's MRR by last month's MRR, convert it to a percentage and that's your month over month (MoM) MRR growth rate.

Common Mistakes When Calculating MRR

For starters, you must remember that MRR is a KPI that can only be used when talking about subscription based businesses. Often time's I'll see eCommerce startups referring to their "MRR" but they don't have any subscription their scenario, they're referring to Average Monthly Revenue or simply Monthly Revenue.

The same goes for one-time payments and lifetime deals...essentially, these aren't "recurring" payments, so they don't belong in Monthly "Recurring" Revenue. If you don't expect to receive the revenue on a regular basis, you can't include it in MRR - doing so will result in an inflated revenue expectation for the business.

Lastly, Founders also forget to include discounts in calculations. If you give someone a discount on a $10/month plan so that they're paying $5/month, your MRR isn't $10/month; it's $5/month.

Ways to Improve Your MRR in 2023

For starters, make sure your software like ours at Sturppy is calculating your MRR correctly; this will help you draw a baseline and set a goal for future growth.

5 hacks to increase your MRR in 2023
  1. Raise your prices. The majority of SaaS and subscription businesses are underpriced...this is mostly because founders are too busy doing other things and don't take the time to think about price! When was the last time you tried increasing your prices by 10, 20, or even 100%? Give it a shot!
  2. Unbundle features. If you currently offer all your features in a single package, try splitting them out into separate plans or add on services. Charge more for these services!
  3. Say goodbye to free plans. Free plans are not pricing plans...they're an acquisition mechanism. To quickly increase your MRR, get rid of your free plan. Will you lose some users? Yes, but are they customers? No!
  4. Move upmarket. This might not be for everyone but if you're selling to small businesses who are barely able to get by, could you potentially also serve larger enterprise customers? My guess is that those larger customers can afford much higher prices than the struggling small businesses!
  5. Start upselling. It is WAY more expensive to attract new customers than it is to keep and upsell your existing customers. Focus on the customers you already have and see if there aren't additional add-ons and features you can sell them. Has one of your customers been using your "starter plan" for 6 months? Have you tried to tell them about the benefits of upgrading to the "pro plan"? No? Why not!?

MRR Example

An easy-to-follow example of how to calculate MRR is provided here for your reference: Let's say that your company has 100 members, each of whom pays $50 a month to be a part of it, and the monthly membership fee. Assuming that during a specific month, you got 10 new customers and 5 existing customers reactivated their subscriptions, your monthly recurring revenue (MRR) for that month is $5,500 ($50 x 110 customers).

MRR is a valuable metric that can be used to assess the growth as well as the general health of your subscription-based business. In order to make judgments based on accurate information, it is necessary to have a solid understanding of how to compute MRR. You will be able to monitor trends and make decisions based on data if you have a firm understanding of your monthly recurring revenue. This will enable you to optimize your product offerings and improve customer retention.

Types of MRR

Organizations use various types of MRR to track their recurring revenue streams. Among the most common types of MRR are:

1. Gross MRR: This refers to all new revenue, including upsells and expansions, from both new and current clients.

2. Net MRR: This accounts for any customer turnover or revenue lost from current clients. It offers a more accurate picture of the total expansion of recurring revenue for a company.

3. New MRR: This is revenue from new clients, giving information about how well a company's customer-acquisition strategies are working.

4. Expansion MRR: This type focuses on the upsells and expansion revenue from current customers, enabling businesses to monitor the performance of their customer retention and base-growing initiatives.

5. Churned MRR: This calculates the amount of lost recurring income from customers who have left an organization, assisting businesses in determining and addressing the causes of customer churn.

It's critical to comprehend the many MRR types and pick the ones that most closely match your company's goals. Organizations may better understand the stability and growth of their recurring revenue streams by measuring MRR, and they can use this information to make decisions that will spur growth and boost their bottom line.

What MRR Doesn't Measure

MRR is a commonly used metric in the software and SaaS industries, providing valuable insights into a company's growth and performance. However, it's crucial to remember that MRR has restrictions and cannot measure all aspects of a business.

First off, MRR does not reflect a company's whole revenue. It only takes into account the recurring income produced by subscription-based goods or services. This implies that the MRR calculation excludes one-time sales like upsells and add-ons.

Second, churn, or the rate at which consumers terminate their subscriptions, is not taken into consideration by MRR. While MRR offers a glimpse of the present recurring revenue, it does not take churn into account when calculating revenue. Businesses should track and examine the churn rate in order to fully comprehend the effects of churn.

Third, MRR doesn't offer details about the actual goods or services. It does not reflect how well the product works in practice or how satisfied customers are. It merely assesses the income earned by the good or service. Consider other indicators, such as customer acquisition cost (CAC) and lifetime value, to gain a holistic view of the firm (LTV).

While MRR is a helpful statistic for figuring out a company's recurring revenue, it's critical to understand its limitations and keep track of various indicators to obtain a whole view of the company.


How to Increase MRR?

A company can raise MRR in a number of ways. Here are some tactics to take into account:

  1. Reduced Customer Churn: One of the main causes of a drop in MRR is customer churn. You may boost MRR by lowering client churn. This can be accomplished by offering top-notch customer service, creating incentives for patrons to stay, and frequently interacting with them to learn about their wants and requirements.
  2. Expansion of Revenue: Increasing a customer's monthly payment is another technique to boost MRR. This can be accomplished by upselling more goods or services or by raising the cost of already existing ones.
  3. Product development: Creating fresh, cutting-edge items can also aid in raising MRR. Businesses may draw new clients and keep their current ones by remaining one step ahead of the competition and providing distinctive products.
  4. Reactivation: Reactivating inactive or former clients may also raise MRR. Businesses can reactivate clients who have stopped using their goods or services by contacting them and extending special offers or incentives.

Why is MRR Important?

MRR is a crucial business statistic because it gives a clear, unambiguous picture of the recurring income coming from a company's goods or services. It offers a reliable reflection of the business's expansion, consistency, and overall financial health.

MRR is an essential metric for organizations because it provides valuable insights into predicting future sales. By tracking MRR, businesses can make informed decisions about how to allocate resources and plan for future growth.

Additionally, MRR is a critical measurement for stakeholders and investors as it gives information about the company's capacity for long-term growth and constant revenue generation. This data can be used to assess a company's overall financial performance or to make investment decisions.

MRR is a crucial measure for organizations since it gives a thorough picture of recurring income, aids in predicting future income, and is a crucial factor for investors and stakeholders.

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