Eliminating the unknown and replacing it with data

Understanding MRR (Monthly Recurring Revenue)

MRR, short for Monthly Recurring Revenue, is generally used by subscription and SaaS businesses. No surprise here, as it is pretty obvious from its name. As far its aim is concerned, much like any other metric, MRR comes to verify the health of your business. How you ask? Well, it’s really rather simple.

MRR looks at the number of your customers, the subscription amount, the billing period and breaks your recurring revenue into a monthly amount. This simplifies things greatly because it allows you to have a segmented view upon your business over the course of a year.

Still, and this is a big one, you need to separate MRR from accounting metrics, as it should not be used in this purpose. The explanation behind it is that because of the nature of MRR, which comes to mix all your billing periods, all from weekly, monthly, annually, and your subscriptions fees, which are of course different, your data is not suitable for accounting.

This metric, although important and worth using in analyzing the health of your business, can be misleading. In terms of making an opinion, it’s very much appropriate. In terms of using it in other purposes, where exact data is requested, it’s not advisable.

To calculate MRR, you need to multiply the number of your customers with an average price/billing amount:

MRR= NUMBER OF CUSTOMERS * AVERAGE BILLING AMOUNT

What do you do with MRR?

Okay, so you might be a bit discouraged about the actual purpose of MRR. After all, if you can’t give it a practical purpose, why would you bother to calculate it in the first place, right? The good news is that there are ways to put the data generated from MRR to use, even if there is no clear connection with accounting. You can estimate how certain strategies are functioning, verify selling price trends, calculate customer lifetime value, study the expansion strategy of your company.

Imagine that you are looking at your monthly recurring revenue, so you can easily verify changes. There is just one catch. How can you measure, out of your entire MRR, what’s new and what’s old? Assuming that you are going to use MRR for tracking expansion, how can you identify the speed with which your business is growing? Good thing we have a different term for that and yes, you’ve guessed it, a new formula. It’s a pretty obvious one, to tell you the truth, New MRR.

Basically, to calculate newly entered revenue, you need to separately calculate the newly gained customers. For example, you have 10 customers paying a $100 fee and 5 paying $200. So, your New MRR= 10*100 + 5*200 = 2000.

Unlike other metrics, churn, for example, MRR brings on new challenges. You see, in the subscription business, things are not all that simple. And thank God they aren’t because those options that make our lives difficult now when having to calculate extra income are what bring new income in the first place. We all love upsells and cross-sales and include them in all sorts of strategies meant to grow our business. But when a client upgrades to a different plan, what happens to our MRR? How is that reflected in terms of revenue? And how do we know what is going on?

Expansion MRR is the metric that will shade some light upon this issue and will help you to better understand the state of your growth. You might have subscriptions that are priced differently and these influence the overall picture of your revenue rate. Looking at the number of customers that have upgraded, you need to calculate the difference in terms of amount. In other words, if you would have 3 customers switching from a plan of $100 to plans of $200, the difference in revenue would be of $300 in total.

So far, so good, but you still need to calculate your overall recurring revenue, right? And you might be tempted to say: But, can’t we just put everything together and that’s how our business is doing? Remember when we said that MRR brings more challenges than other metrics? Well, we weren’t lying. In order to calculate complete MRR, known as Net New MRR, you need to consider Churn MRR. It’s pretty fair, right? Only after understanding how much you have lost, can you accurately understand how much you have gained.

To calculate Churn MRR, you need to have a clear view of the customers who have either canceled their subscriptions or that have chosen a cheaper plan.

So, for the sake of the argument, let’s say you have lost two customers with subscriptions worth $10 each and 2 have changed their plans from $10 subscriptions to $5 ones. In total, you have lost $20 from your cancellations, plus, another $10 from the downgrades. Your total Churn MRR would, therefore, be $30.

Now that you have all elements, you can calculate New Net MRR:

Net New MRR = New MRR + Expansion MRR – Churned MRR