MRR

Table of Contents

What is MRR (Monthly recurring revenue)?

How to Calculate MRR?

Common Mistakes When Calculating MRR

Ways to Improve Your MRR

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 offerings...in 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 2022

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 2022
  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!?