“Happiness is the longing for repetition,” said the world-known Czech novelist Milan Kundera in one of his novels. And if you wonder what the relation between this phrase and the article’s title is, I would give you a hint - it’s in the word “repetition.” In business, the same as in life, we value constancy because it gives us a feeling of stability and reduces uncertainty stress. The predictable monthly revenue is a foundation of all business growth-related plans.
We at Eleken think that it is a company’s lifeblood and health measurement. The revenue calculation seems as easy as pie yet can show you a distorted picture when performed incorrectly.
If you got excited to know more about MRR metrics, keep reading this article and learn why MRR is important, how to properly calculate it, and what are ways to increase your monthly revenue.
What does MRR stand for?
Let’s start with a quick recap of what MRR is.
MRR means monthly recurring revenue a SaaS company expects to receive each consequent month. Given most B2B SaaS businesses employ a subscription model, as long as their customers stay with a company and pay a fixed amount of money each month, the company can predict its monthly revenue. If customer retention rate is high and churn rate is not significantly deviating from month to month, MRR can be used to forecast the company’s average growth rate in a long perspective. By the way, you can learn more about SaaS churn rate and average SaaS growth rate in devoted articles, elaborating on these crucial business metrics.
Based on the above, it becomes obvious that MRR business metric is the main indicator of a healthy cash flow for subscription-based businesses. For the in-depth analysis, you can separate specific MRR types and get a more detailed understanding of what your total revenue is built from. We’ll talk about this point in a couple of paragraphs.
Why is MRR important for SaaS
Monthly recurring revenue underlies:
- Business stability - predictable income gives freedom to build ambitious plans and ensures they have high chances to become real. Being able to forecast future earnings, it becomes easier to plan the expenses and create a company’s “safety bag” for just-in-case.
- Company growth - based on current MRR, a SaaS business can estimate long-term income growth and create an actionable revenue expansion plan.
- Investor valuation - for an early-stage startup with stable MRR, it’s much easier to receive high valuations from investors and get funded. For mature companies preparing for an IPO, a high investor valuation leads to a greater stock price.
And now, let’s dive into MRR calculation.
How to calculate MRR
The monthly recurring revenue formula is pretty straightforward.
MRR = Monthly users number * Monthly ARPU (average revenue per user)
For example, if you have ten customers paying each month $10 subscription price, your MRR would be 10 * $10 = $100. In case you offer several price plans, then you should do the same exercise for all plans and summarize the results to find out your total MRR.
Though the total revenue figure may be enough to understand the trend, MRR decomposition will unveil the root of income fluctuation in terms of a particular month. Under “decomposition,” I mean MRR types a total MRR consists of.
Types of MRR
Financial experts define five MRR types, which eventually make up the total MRR figure you see in your monthly reports. Understanding what brings you more money and where that gap your revenue leaks out is, you can control your income flow more efficiently.
- New MRR - the revenue from new customers your company acquired in a given month
- Churned MRR - the amount of revenue you lost due to customers’ subscriptions cancellations
- Expansion MRR - MRR from the upgraded users
- Contraction MRR - lost revenue from downgraded users
- Reactivation MRR - the revenue from previously churned customers
For example, below is the report generated with Baremetric tool. You can see a month-to-month revenue breakdown and how it differs compared to the previous period on the graph below.
Even though the MRR formula is not complicated at all, there is a certain risk of including or excluding data, which can confuse MRR calculation and distort the results.
So, let’s clarify what you should or should not take into consideration when calculating your revenue.
What to include into MRR calculation
The five MRR types we discussed in the previous section clearly indicate with their very names, they should be included in the total MRR calculation. But not only those figures are important. Your calculation should also take into account:
- All recurring, new, lost revenue from customers as well as plan upgrades and downgrades. Also, here goes any additional charges for extra users, seats, volume, etc.
- Discounts you provide within a specific month. If not preliminary planned, promotional activities can seriously impact the final revenue you intend to generate this month. For example, if your customer’s regular monthly fee is $150, but they paid a discounted $100 price for the first month of service usage, your MRR from this customer will be $100, not $150.
- Delinquent and transaction charges should also be minded while doing MRR calculation. Whereas some business owners tend not to mix up financial expenses with income from sales, invisible deductions will eventually pile up and “suddenly” diminish expected monthly results.
What to exclude from MRR calculation
Here the simple rule goes: don’t take into account all payments that are not recurring.
Among those are:
- Long-term contracts paid upfront
Even if a customer pays you an annual fee at once, it doesn’t mean it falls into a particular month’s revenue. In this case, the payment should be evenly divided by twelve months. Though getting money upfront is good for a company’s financial health, the MRR metric is not measuring a cash flow. Its primary purpose is to measure how fast and efficiently your business is growing by comparing month-to-month dynamics.
- One-time payments
This point is close to the previous one with a slight difference. If you offer customers not only a SaaS service but also a SaaP (software as a product), which usually implies you sell it once and leave it at customers’ discretion, then you shouldn’t include one-time payment into MRR calculation.
- Trials that don’t convert
SaaS companies’ most common mistake is including “projected” trial customers alongside those who actually paid for the subscription. We clearly understand that not all trial users will eventually convert. Including them into “new” and then “churned” customers, we create wrong monthly income expectations.
Ways to increase your MRR
You can boost your company’s revenue by employing strategies listed below. They can be used at any stage of business growth and adjusted based on the analysis of the results.
Upsell your existing customers
To upgrade your current users is usually more cost-effective than acquiring new ones. Try upselling your customers to higher-tier plans by offering extra product values. What you need to implement this strategy is to know your target audience’s exact needs and pain points.
Utilize different pricing models
If coming to your pricing page, a lead won’t find an appropriate price plan that satisfies their needs, you will more likely lose a potential customer.
Here are the most common SaaS pricing models you can try implementing with your business.
- Per-seat pricing
Freshdesk is an excellent example of this approach. They offer a broad range of pricing plans from a limited-features free plan up to a $99/agent plan suitable for enterprises. The per-seat (or per-user) pricing model’s value is its correlation to a customer’s company growth. The more the business scales, the higher the price plan they may switch to.
- Usage-based pricing
This type of pricing gives users more flexibility in terms of usage intensity. They are fully accountable for the usage volume and the cost they will end up paying. For example, Hubspot charges customers for the number of marketing contacts they will have available within the particular price plan. Though not that straightforward as per-user billing, usage-based pricing may be seen as a win-win model of customer-business relationships.
- Add-on pricing
On top of features you offer within your plans, you can give customers the possibility to enhance their existing plans with additional functionality. Referring again to Hubspot, which is definitely one of my favorite SaaS companies in terms of how they pack their services, they offer to build up to 3.000 custom reports with the increased dashboard limit for an extra $200/month.
Overall, your pricing page should be visually appealing and comprehensive. As a design agency, we are confident that user-centered design matters especially when it’s going about pages where users are expected to make the desired action. Check our SaaS pricing page design article where we gathered the worth-looking examples you can learn from.
Continue improving your product
To retain your customers and make them willing to continuously pay for your SaaS, you should keep enhancing your product and regularly demonstrate the updates to your customers. Communicate them added functionality, upcoming products, new version release, bug fixes, and any other information you find useful to increase customer loyalty resulted in a high retention rate.
Last thoughts
Monthly recurring revenue is one of the most critical SaaS metrics you should regularly check to ensure your business is on the right track. To get an accurate result, you need to consider some nuances in MRR calculation. Think about what you need to include or exclude when calculating your MRR based on the information you learned in this article.
You can grow your revenue by price strategies diversification and consistent product improvement that will help retain existing customers and attract new ones. To get a more in-depth knowledge of crucial SaaS metrics, read next about AARRR metric in our blog.
