Eliminating the unknown and replacing it with data

Total Guide to Understanding Monthly Recurring Revenue

One of the key metrics in the SaaS industry alongside churned revenue, specifically for subscription businesses, is the monthly recurring revenue. While you may be sure that your product is trustworthy and efficient, at the end of the day, you are undoubtedly what you measure. Additionally, you need to look beyond the mechanics behind your product and look toward those of your marketing efforts. Learning how to price SaaS correctly is important, as is working with a strong SaaS subscription billing solution. Calculating the recurring revenue will allow you to verify whether or not you are applying the correct strategies. Now, let’s dive into the MRR metric and its relevance to your subscription business.
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 is the MRR?

MRR stands for Monthly Recurring Revenue and is generally used by SaaS and subscription businesses. No surprise here, as it is pretty evident from its name. As far as its aim is concerned, much like any other metric, MRR comes to verify the health of your business by measuring your monthly recurring earnings. The MRR looks at the number of your existing customers, their subscription amount, and 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 of your business for over a year.

What is the Expansion Monthly Recurring Revenue (MRR)?

To put it bluntly, the Expansion MRR looks at additional revenue your existing customers generate. In terms of means, you can gain additional revenue through:
  • Upsells: switching from a free or low-priced plan to a higher-priced one.
  • Cross-sells: revenue growth generated through the purchase of additional products.
  • Reactivations: previously churned customers returning to your SaaS products.
  • Add-ons: purchasing ads-ons that are not part of existing subscription plans.

Special Mention: This is a metric to follow because it indicates growth with no CAC costs.

Expansion revenue shows how much your additional MRR is without any customer acquisition costs on your behalf.

What is the New MRR?

New MRR is one of the MRR metrics that looks at monthly revenue generated by new customers. It is essential to mention the difference between this metric and the Net New MRR. And that difference is the MRR churn, which is the lost MRR due to downgrades or even subscription cancellations. Net New MRR is crucial because it gives you a clear view of the recently earned profit from new customers by removing the lost revenue from your calculations.

How to calculate MRR (Monthly Recurring Revenue)

It is very simple to calculate the monthly recurring revenue. All you need to do is apply the standard MRR formula.

MRR = Number of Customers Average Billing Amount

Special Mention: You need to separate the subscription MRR from your accounting metrics.

When you calculate MRR, you mix all of your billing periods, from weekly, monthly, and annually, to your subscription fees, which are different. The data you obtain is not suitable for accounting purposes.

How to Calculate the Expansion MRR

To calculate the expansion MRR rate, you will need to use the following formula:

(Expansion MRR at the end of the month – Expansion MRR at the beginning of the monthExpansion MRR at the beginning of the monthExpansion MRR at the beginning of the month) x 100

In other words, if the additional revenue registered at the beginning of the month is $2500 and $4000 at the end of the month, your expansion MRR rate is 60%.

How to Calculate New MRR & New Net MRR

To calculate New MRR revenue, you will have to look at the number of customers and know how much profit they have generated. The formula you will use is the following:

New MRR Rate = New Customers x MRR per New Customer

The churned MRR is the lost MRR, so to figure it out, you will need to divide the MRR Churn, which is the sum of all cancellations over a set period, by the MRR at the beginning of the month and then multiply it by 100.

Churn MRR = (MRR CHURN/MRR at the beginning of the month) x 100

Now, as far as the Net New MRR is concerned, you will need to apply the following formula

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

Top 3 Reasons Why Your MRR SaaS Metric is Important

  1. Keep track of your earnings

    The average MRR is a key metric to your subscription business because it measures your growth. Tracking MRR, as well as your annual recurring revenue, allows you to better grasp the business health and success of your SaaS.

  2. Understand the level of sustainability

    It is crucial to know if your business can sustain a blow. Based on the monthly net recurring revenue generated by your subscribers. And depending on your monthly recurring revenue MRR findings, you can decide if your SaaS business can survive revenue lost by failing to seal a potential deal.

  3. A strong predictability tool

    With a clear view of the average MRR, you can predict future cash flows using this metric. You can make up your mind regarding future investments and establish achievable goals. A company’s recurring revenue can offer a glimpse into its future earnings.
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