Monthly Recurring Revenue, often abbreviated as MRR, is one of the most important metrics a SaaS business should track, and for a good reason: monitored over time it is a very good indicator of how your business is doing.
That being said, it is not a golden bullet and you should also keep an eye on other metrics, such as Revenue Churn and Cohort Analysis, which can unearth problems you wouldn’t otherwise notice, looking at growing MRR value alone, problems keeping you from hitting that “hockey stick” growth.
Before we get to the part explaining how to calculate Monthly Recurring Revenue, let’s talk about what MRR really is, as for something so important and relatively simple, there is a lot of misconceptions about it.
Let’s assume you are a brand new business and you just got your first customer who subscribed to a $10/mo plan. What’s your MRR right now? Easy, it’s $10. What is it going to be next month? Still $10. How much money are you charging your (for now) only customer every month? $10.
Now you’ve got another customer, this time on an annual plan, $120/yr. The additional MRR value from that customer is another $10 ($120 / 12 months = $10), for a total $20 MRR ($10 + $10 = $20).
Here’s where it starts to get confusing. If you look at your Net Revenue for this month, you’ll see $130 ($10 + $120), but next month it’s going to be only $10. If you track your business based only on Net Revenue, you will be very excited the month you charge your annual subscription and very disappointed the other 11 months of the year.
It becomes a lot more prominent when a business charges all annual customers at the same time, say, beginning of the year. What ends up happening is a large Net Revenue value for January and much lower value for all other months, whereas MRR paints a much more accurate picture of your business’ health.
The value of all of your subscriptions is normalised to a month. Sounds pretty obvious and straightforward: if someone is on an annual plan then divide the value by 12, etc. But what about subscription-based businesses sending physical goods to their customers every 4 weeks? That’s not exactly a month. In fact, there’s exactly 13 of those 4-week periods in a year, instead of 12. So a $10 subscription that renews every 4 weeks will contribute about $10.83 towards your MRR value.
It’s a very simple example, but it highlights the importance of normalising the timeframe, in this case the most common choice is a month. There’s also a closely related metric called Annual Run Rate (or ARR), which is essentially MRR multiplied by 12.
Another difference between Net Revenue and MRR is that the latter does not include any one-off fees or temporary discounts. We should only focus on predictably recurring revenue here. If a subscription is for $49 USD, but with a one-off setup fee of $10 USD, and with a 50% off discount for the next 3 months, we should still treat it as $49 MRR. That being said, if a subscription has a permanent 50% discount attached to it, we should treat it as $24.50 MRR.
Yes, we are still calculating revenue here, but in most cases not the exact amount of revenue that will hit your bank account every month - and that’s still without taking any payment processor fees into account, without VAT or any other applicable taxes.
A common mistake is focusing on the value of the invoice charged to the customer - let’s assume they upgraded from $50/mo to a $100/mo plan exactly halfway through the cycle - the new invoice on the day of the upgrade would be for $75, with $25 prorated from the previous $50 payment, for a total of $100 for the new subscription plan.
ARR, or Annual Run Rate, is simply a MRR value multiplied by 12, to give you your annual revenue value. Simple as that!
The formula for calculating MRR seems pretty simple: take all active subscriptions, normalise them to a monthly value and sum it all up. In fact, we’ve created a very simple spreadsheet (click File > Make a copy) that you can use yourself to calculate your current MRR value.
Things become a lot more complicated when you want to track the MRR value for your business on an ongoing basis, especially with hundreds or thousands of customers, where every day there’s someone new signing up, someone who upgraded/downgraded or cancelled their subscription.
This is why MRR.io exists - it's a MRR dashboard that will make your life much easier by keeping track of the MRR value for you.
Try out MRR.io for free for 30 days, no credit card required, no strings attached. I’m sure you will find it valuable to be able to check Monthly Recurring Revenue and other metrics for your business in real time, whether you need to know the MRR value for Stripe, Paddle or another payment processor.
Try out MRR.io for free!