Monthly Recurring Revenue (MRR) is a key metric in evaluating the success of a software-as-a-service (SaaS) business. But what is MRR? How do you calculate MRR? And, most importantly, how can tracking MRR help your business?
In this article, we’ll provide a comprehensive guide to understanding and calculating MRR. We’ll explain what MRR is, how to calculate it, what the benefits are of tracking MRR, provide some tips and strategies for calculating MRR, look at how MRR can be automated, and finish with an example of calculating MRR.
If you’re ready to get started, then let’s dive in and take a look at what MRR is and how to calculate it.
Monthly Recurring Revenue (MRR) is an important metric for SaaS business owners to track and measure their company's performance. It provides an accurate representation of a company's income from subscription-based agreements. In SaaS, customers agree to a contract and are billed a set amount each month as payment for the services the company provides them. This ballpark value, the total of customers' contracted monthly payments to the company, is referred to as MRR, and is generally used in comparison to other financial metrics such as projected revenues and profits.
MRR is an essential figure for understanding the sustainability of SaaS businesses. It allows companies to calculate their rate of growth and overall success, as well as individual customer value. It's also useful for tracking commitments made to customers, such as discounts and free months, as well as changes in customer agreements which can affect the overall MRR number. All of this contributes to an accurate measurement of any SaaS business, making Monthly Recurring Revenue an important figure to monitor and analyze.
The biggest challenge with calculating MRR is understanding how it works and knowing how to accurately report and track it. MRR calculation starts with a few key steps:
Step 1: Gather the data.
The first and most important step when calculating MRR is gathering all the necessary data. This data could come from customer invoices, purchase orders, recurring subscription records, and other financial documents. Make sure to include all of the relevant subscription and payment amounts for each customer.
Step 2: Normalize the data.
Next, you need to “normalize” the data by converting each subscription or payment into a monthly value. This means taking into account annual subscriptions, or payments that are done on a quarterly or semi-annual basis and dividing them into the equivalent value per month.
Step 3: Sum it up.
Finally, you can add up the total monthly subscription or payment amounts to get your overall MRR. This gives you a baseline number that you can use to measure and track your company’s recurring revenue performance over time.
In addition to these steps, you also want to make sure that you are accounting for any discounts or credits that are applied to the customer’s account, as well as any cancellations, upgrades, or downgrades in services. If any of these variables are changing on a monthly basis, it’s important to make adjustments to your MRR calculation.
Tracking and calculating MRR can be complex and time-consuming, but it’s an important measure for helping you understand the health of your SaaS business. Having accurate and up-to-date data on your MRR gives you a reliable metric to measure the performance of your company and compare it to other competitors in the market.
Tracking MRR is essential to any Saas business. It's important to measure the performance of your business, gauge the success and effectiveness of your pricing models, and spot trends in customer acquisition and churn. Here are some of the key benefits of tracking MRR:
Monitor revenue growth: Tracking MRR allows you to easily measure month-to-month revenue growth. This is important for setting revenue goals and spotting any abnormalities or downturns.
Gauge pricing models: Tracking MRR can reveal trends in customer behavior and pricing. By looking at which pricing plans customers are choosing, you can determine which pricing plans are most successful and revise any that are not achieving results.
Spot customer trends: By tracking MRR, you can quickly spot suspicious changes in customer activity. For example, if you see a sudden spike in MRR, it could be an indicator that you have acquired a large number of new customers. Conversely, a sudden drop in MRR could indicate that customers are leaving or churning. Being able to spot these trends allows you to act quickly and make changes to your strategy.
Identify risks: Tracking MRR can help you identify potential risks to your business and act accordingly. If a particular customer segment contributes a disproportionate amount of your total MRR, then losing that customer could have a big impact on your bottom line. By tracking MRR, you can identify these risks and take steps to mitigate them.
Plan for future growth: Tracking and analyzing your MRR makes it easier to plan for future growth. You can identify areas of the business where revenue is growing quickly and focus your resources and attention accordingly. Similarly, you can spot areas of the business that are lagging and adjust your strategy to try and improve those results.
When it comes to calculating MRR for a SaaS business, there are a few simple tips and strategies to help ensure accuracy and accuracy.
Normalize Subscription Values: When calculating MRR, it is important to normalize all of your subscription values to a monthly amount. This ensures that all of your subscription values are included in the calculation, regardless of whether a customer is on an annual subscription plan or decided to go with a monthly plan.
Automate Calculations: Managing huge amounts of data for MRR can be time-consuming and complex. By using automated tools, all computations can be made automatically. This makes the process easier and more accurate.
Monitor Churn: To make sure your MRR calculation is accurate, you must factor in customer churn. Here, you must account for customers who renew their plan but at a reduced rate or decide to opt-out altogether. Factors like refunds, downgrades, and cancellations must also be accounted for in order to arrive at the MRR of your business.
Include Upgrades: Upgrades are also important to include in your MRR calculation. This will ensure a more accurate view of your current MRR since upgrades from existing customers often represent an important portion of your revenue.
Use Relevant Metrics: When it comes to tracking your MRR, there are other specific metrics that you should be tracking as well. The most important of these include Average Revenue Per User (ARPU), Average Revenue Per Account (ARPA), and Lifetime Value of a Customer (LTV). Tracking these metrics will give a more rounded view of your SaaS businesses’ financial health.
As a SaaS business, keeping track of your MRR can be a difficult task without the help of automated tools. Without the precision and accuracy of automation, you may be left with inaccurate, outdated or incomplete information that can drastically skew your MRR estimates, resulting in incorrect reports or forecasting.
Using automated solutions, you can set up recurring billing, keep track of subscription renewals and cancellations, track upgrade and downgrade changes as well as send out automatic and highly targeted emails. Automation also allows for a much higher accuracy in terms of data and reporting, giving you the most up-to-date and accurate MRR possible.
Automated solutions can also help you keep track of customer segmentation, allowing you to better forecast your MRR and optimize your pricing. When you’re aware of which customer segments are likely to generate the highest MRR, you can adjust and focus your strategies in order to optimize your performance.
Moreover, automation can help with customer lifetime value. By utilizing automated tools, you’re able to predict customer's long-term MRR and thus develop loyalty programs, upsell and cross-sell options and keep your customers happy.
Finally, automation can also help you forecast the future of your business. Using the data collected using automated solutions, you’ll be able to predict future MRR, better plan resources and budget and ultimately grow your business faster.
Running a SaaS business without automated tools can cause a massive strain on your resources, so it’s important to think seriously about investing in automated solutions to help you track and measure MRR. Automation can help ensure that your results are more accurate, up-to-date, and provide you with the data and insights you need to make better business decisions and maximize success.
Calculating MRR can seem like a daunting task. Having a clear understanding of the components that need to be taken into account and following some tried-and-tested methods can help to make the process more manageable and straightforward. As a general rule, the formula for calculating MRR is:
MRR = (contract terms x number of customers x average revenue per user)
To calculate MRR for your own business, let's look at an example:
Assume that you have 20 customers with the following subscription plans and terms:
• Customer 1 has a $1000/year subscription
• Customer 2 has a $300/month subscription
• Customer 3 has a $200/quarter subscription
• Customer 4 has a $500/3 months subscription
In order to calculate the overall MRR, you will need to convert each customer's subscription plan into a normalized monthly value, as follows:
• Customer 1: $1000/year = $83.33/month
• Customer 2: $300/month = $300.00/month
• Customer 3: $200/quarter = $66.67/month
• Customer 4: $500/3 months = $166.67/month
Once the subscriptions have been normalized, the total MRR can be calculated by adding all of the normalized monthly values:
MRR = $83.33 + 300.00 + 66.67 + 166.67 = $616.67
The MRR for the business in this example is $616.67/month.
By applying this formula to all subscription plans (and factoring in any discounts or promotions) and taking into account your average revenue per user, you should be able to calculate your total MRR quite quickly and easily.
By keeping a running total of your MRR, you can track your company's performance on a monthly basis, helping you make data-driven decisions about budgeting and product development.
If you run a subscription-based SaaS business, then accurate MRR calculations are critical for the successful operation and growth of your business. Tracking MRR provides insights into customer behavior, tells you how well your pricing and sales strategies are working, and ultimately helps you to make better-informed business decisions.
Accurately determining your monthly recurring revenue involves a few basic steps: normalizing any customer subscriptions to their monthly rates, summing up the resulting values to make an aggregate figure of all subscription charges, and subtracting one-time fees to make sure that you are getting true MRR figures.
More than that, automation can be used to help with tracking MRR and ensure that your calculations are consistently accurate. By using software that is specifically designed for MRR tracking, businesses can be better equipped to focus on their core operations without needing to get bogged down in lengthy and complicated calculations.
It is hoped that this comprehensive guide has provided you with enough information and tips to accurately measure and track your MRR, enabling you to make better-informed decisions, ultimately leading to sustained success in your subscription-based business.