What is Monthly Recurring Revenue?

Why is MRR important for subscription businesses?

For companies operating on a subscription model, Monthly Recurring Revenue (MRR) is more than a simple financial metric; it's a cornerstone of your strategic and operational planning. MRR is a reliable barometer of the company's financial health, offering a steady measure of the income generated from your customer base each month. This consistency is crucial for making informed forecasts about revenue trends, enabling you to identify whether your revenue is on an upward trajectory or facing declines.

MRR isn't just significant for internal assessments and strategy adjustments; it's also an important factor that potential investors and acquirers scrutinize closely. It demonstrates the predictability and stability of revenue, key attributes that can influence investment decisions. A solid grasp of your MRR can significantly improve your business’s appeal to external stakeholders by highlighting its sustained financial viability and growth potential.

Here are four primary reasons why MRR is important for your business:

1. Predictability: MRR provides a reliable way to forecast future cash flows and budgets, as it allows you to predict the amount of revenue you can expect to receive monthly. This predictability is essential for financial planning and managing expenses efficiently.

2. Scalability: MRR enables you to scale your operations more effectively, providing a steady and predictable cash flow. This allows you to invest in growth opportunities with minimal risk, such as marketing and product development.

3. Customer relationships: MRR helps you build long-term relationships with your customers, providing a recurring revenue stream tied to the ongoing value that customers receive from the product or service. This enables you to focus on customer retention and develop deeper relationships with your customers.

4. Growth metrics: MRR is essential for measuring the growth and success of a business. It provides insights into revenue trends, customer acquisition and retention, and the basic health of the company. By tracking MRR, you can identify areas for improvement and make informed decisions about your product roadmap, sales, and marketing efforts. In a macroeconomic climate that rewards efficient growth, having a firm grasp of your MRR is table stakes.

Ten different types of MRR

Various monthly recurring revenue models provide flexibility to align revenue generation strategies with customer needs and consumption habits. This approach ensures a more predictable revenue stream and nurtures enduring customer relationships to increase subscriber retention and minimize churn.

Here are ten types of monthly recurring revenue models:

• New MRR: This is your business's revenue from all the new customers gained during a month. New MRR can be directly attributed to all your new customer acquisition strategies and helps provide attribution to the channels contributing revenue. Additionally, when New MRR is compared to the Customer Acquisition Cost (CAC), it can provide insights into the efficiency and profitability of acquiring new subscribers.

• Upgrade MRR: This is the additional MRR from all customers who have upgraded to a higher-pricing plan from a lower-priced plan or purchased a recurring add-on. Upgrade MRR accurately represents how well your product scales with the growth of your customers.

• Expansion MRR: Often confused with Upgrade MRR, Expansion MRR also considers MRR contribution from reactivation of a previously canceled subscription and free-to-paid conversions. Especially useful for subscription businesses that use a freemium model, contrasting Expansion MRR with Upgrade MRR gives a deeper level of understanding of how well you’re able to convert free customers to paid customers and how often canceled subscribers return.

• Contraction MRR: Contraction MRR tracks the Monthly Recurring Revenue (MRR) lost through cancellations, downgrades to lower-tier plans, removal of recurring add-ons, or discounts. It provides insights into your business's ability to retain MRR from current subscribers, reflecting your product/service's scalability to meet customer demands effectively.

• Churn MRR, also known as Cancellation MRR, is a key element when calculating Contraction MRR. It reflects the monthly recurring revenue lost due to churned or canceled subscriptions. Analyzing churn helps gauge how effectively your product meets customers' needs. In the initial phases of a subscription-based business, a high or increasing churn MRR or cancellation MRR may suggest a misalignment between your product and market demand. In later stages, a similar trend might signal the impact of a recent marketing campaign that attracted customers with inaccurate expectations.

• Downgrade MRR Downgrade Monthly Recurring Revenue (MRR) comprises all MRR reductions from current customers, except for cancellations, contributing to Contraction MRR.

• Reactivation MRR: Reactivation Monthly Recurring Revenue (MRR) refers to the extra revenue generated from customers who had previously churned or canceled their subscriptions. It is a key element of expansion MRR. Notably, these customers should not have contributed any revenue to the MRR in the previous month (excluding users in free trials).

• Net new MRR: This is the net amount of MRR gained or lost, calculated by adding new MRR, expansion MRR, and churn MRR together.

• Average revenue per account (ARPA): This is the average revenue generated per customer, calculated by taking the average of how much all customers are paying and dividing it by the total number of customers.

How to calculate MRR ?

Calculate MRR by considering all active and non-renewing subscriptions, excluding those in free trials from the calculation.

The MRR formula 

MRR = Sum(Monthly Recurring Charge of all paying customers)

If you know your ARPU (Average Revenue Per User), you can multiply it by the number of paying customers to find your MRR.

MRR = ARPU * Number of paid customers

For example, if you have 100 customers paying an average of $50 per month, your MRR would be $5,000.

Remember, MRR can be influenced by three factors: new MRR, expansion MRR, and churn MRR. New MRR is the additional revenue new customers contribute to the top line. Expansion MRR is the additional MRR that results from cross-sells or upsells to existing customers.

Churn MRR represents revenue lost from customers who cancel or downgrade subscriptions. For a precise view of your business growth, compute net new MRR by summing new MRR, expansion MRR, and churn MRR. This metric indicates the MRR gained or lost by your company.

Common mistakes when calculating MMR

It’s crucial to avoid common mistakes and ensure accurate data inputs when calculating your Monthly Recurring Revenue (MRR) because it directly impacts your financial insights and decision-making processes.

Common mistakes when calculating Monthly Recurring Revenue (MRR) include:

1. Incorrectly accounting for non-monthly billing intervals: Failing to adjust for non-monthly billing intervals can lead to inaccurate MRR calculations.

2. Including non-recurring revenue: Including one-time payments or non-recurring revenue sources in MRR calculations can skew MRR accuracy.

3. Treating MRR as ARR (Annual Recurring Revenue): Confusing MRR with ARR can lead to errors in forecasting and financial reporting, as these metrics serve different purposes and timeframes.

4. Adding non-recurring costs: When adding non-recurring costs, MRR must comprise only the recurring revenue from customers, excluding any one-time expenses. This distinction helps ensure clarity when tracking revenue.

5. Ignoring discounts: Failing to account for discounts given to customers can distort the actual MRR contribution from each customer, leading to inaccurate calculations and an overinflated CLTV.

What is a good MRR rate? 

A good MRR rate varies depending on the stage and growth of your business. A recent survey found that the average growth rate across 424 SaaS companies listed was 52%. Does this mean your subscription business has to grow by 52% to have a “good” MRR?

For early-stage startups, a good annual churn rate is between 10%-15% for the first year, while for established businesses, a good SaaS churn rate is under 1% for monthly churn and between 5%-7% for annual churn.

To increase MRR, you can focus on strategies such as upselling and cross-selling, reducing churn, and implementing effective marketing strategies. These strategies can help you improve your MRR by increasing revenue from existing customers, reducing revenue loss from churn, and acquiring new customers.

When calculating MRR, remember to consider different types of MRR, such as New MRR, Expansion MRR, and Churn MRR, to get a more accurate picture of revenue growth and trends.

By tracking different types of MRR, you can identify areas for improvement and make data-driven decisions to increase revenue. In addition to MRR, you can also use metrics such as the SaaS quick ratio to measure revenue growth and churn.

The SaaS quick ratio is calculated by dividing New MRR and Expansion MRR by Downgrade MRR and Churn MRR. A good SaaS quick ratio is considered to be above 4.0. 

This metric can help you determine if your revenue growth is supported by effective churn management and customer retention strategies.

Overall, a good MRR rate depends on the stage and growth of a SaaS business, and increasing MRR requires a combination of strategies to increase revenue, reduce customer churn, and acquire new customers.

By tracking different types of MRR and using metrics such as the SaaS quick ratio, you can make data-driven decisions to increase revenue and grow your business.

How to increase MRR for your business

Using the strategies outlined below, you can increase MRR for your business and improve overall financial performance.

1. Upsell to your client base: Encourage existing customers to upgrade or switch to more comprehensive plans. This strategy can generate additional revenue without the need to acquire new customers and ensure your subscribers get the most value from their subscriptions.

2. Increase prices: Regularly review your pricing models and make adjustments as needed. This could involve increasing prices due to rising material or labor costs, aligning with higher market prices, or reshaping your pricing strategy to highlight specific subscription tiers, products, or services. 73% of subscription professionals are planning to increase prices in 2024, according to the Subscription and Revenue Growth report.

3. Free trials: Offer free trials to potential customers, allowing them to test your product or service before committing to a paid subscription. This strategy can increase customer acquisition and provide you with a base of customers to upgrade to a paid plan.

4. Keep MRR churn to a minimum: Implement effective dunning and proactive cancellation management to minimize churn and maintain a healthy MRR. This includes communicating with customers to collect past-due balances before canceling their accounts and offering flexible billing and subscription options to accommodate their evolving needs.

5. Run promotions: Offer promotions or discounts to attract new customers or encourage existing ones to upgrade their subscriptions. This strategy can help increase MRR and improve customer retention.

6. Provide a yearly subscription payment plan option: Offer a discounted rate for customers who pay annually, which can help increase revenue and improve customer loyalty.

7. Create landing pages: Develop custom landing pages for different customer segments or marketing campaigns to improve conversion rates and increase MRR.

8. Overdeliver and provide an exceptional customer experience: Focus on providing excellent customer service and support to encourage customer loyalty and reduce churn. This strategy can help increase MRR and improve customer retention over time.

9. Track performance with detailed reporting: Use detailed reporting and analytics to monitor MRR growth and identify areas for improvement. This strategy can help you make informed pricing, marketing, and customer retention decisions.

10. Expand upmarket: Consider expanding your business by targeting larger enterprises or offering more comprehensive solutions. This strategy can help increase MRR and improve customer loyalty.

11. Get rid of the word free: Avoid using the word "free" in your marketing and pricing strategies, as it can attract customers who are less likely to convert to paid subscriptions. Instead, focus on offering value and benefits that justify the cost of your product or service.

Conclusion

Monthly Recurring Revenue (MRR) is a crucial metric, especially if you offer subscription-based services. It tells you how much money you can count on making every month. By calculating your MRR, you can predict future earnings and plan your growth strategies more effectively.

Ready to supercharge your monthly recurring revenue (MRR) engine? Take the first step towards maximizing your monthly revenue by requesting a demo of Chargebee, the leading Revenue Growth Management (RGM) platform tailored for subscription-based businesses. 

Our main objective is to help you increase your revenue through various solutions, including efficiently managing subscriptions and recurring billing, optimizing pricing and payments, accurately recognizing revenue, streamlining collections, and improving customer retention. Chargebee provides over 6,500 businesses with the tools to calculate their subscription revenue easily, allowing them to work more efficiently.