Monthly Recurring Revenue (MRR) -
What it is & How to Calculate it

We've covered sales metrics in the past, but for anyone in the world of SaaS, Software as a Service, one of the most important metrics to keep track of is Monthly Recurring Revenue or MRR.

You should always know what your revenue is, but specifically, the monthly revenue is important for anyone running a business in the world of B2B with a subscription basis.

In this article, we'll delve into the importance of MRR, deepening our understanding of it, how to calculate it, and its importance for SaaS sales.

Monthly Recurring Revenue (MRR) represents the consistent stream of revenue your business generates on a monthly basis. It reflects the combined impact of ongoing subscriptions that persistently renew for your products or services and the influx of new subscriptions being added.

As an easy example, how many subscribers Netflix maintains per month is how you should think about it.

MRR serves as a valuable metric, amalgamating the complexities of diverse pricing plans and billing cycles into a singular and comprehensible indicator that allows you to monitor your financial performance over time.

Calculating MRR is not too difficult, in fact, the equation itself is pretty simple.

You simply multiply the average revenue per account by the total number of customers for that month, so the formula comes out as follows:

MRR = Number of Customers x Average Billed Amount

This means that 10 customers paying an average of $100 per month results in an MRR of $1,000:

$1,000 (MRR) = 10 (Number of Customers) x $100 (Average Billed Amount)

There is no one type of MRR, so familiarizing yourself with the other types of MRR you may want to keep track of is important.

They all serve different purposes and can be used to track different metrics that are useful for any company to be aware of. Here are a few to consider:

New MRR quantifies the impact of fresh customers acquired within a given month on your company's revenue. So, if your business successfully acquires 5 new subscribers, each on a $500 per month plan, the calculation for the new MRR becomes:

New MRR = 5 (Number of New Customers) x $500 (Average Monthly Subscription Fee)

In this scenario, your New MRR amounts to $2,500, signifying the additional monthly revenue derived from these 5 new customers and their respective subscription plans.

Upgrade MRR is additional revenue stemming from the process of upselling and the migration of customers to higher-tier subscriptions on a monthly basis. To compute Upgrade MRR, it is essential to consider any supplementary features or add-ons linked to these upgraded subscriptions.

Upgrade MRR represents the financial lift achieved by upgrading customers to more comprehensive plans and the accompanying add-on purchases.

For a practical example, if an existing customer initially subscribed to a basic plan with a monthly fee of $50 and then decides to upgrade to a standard plan priced at $200 per month while also adding an extra feature or add-on priced at $25 per month, the calculation for Upgrade MRR is as follows:

Upgrade MRR = ($200 - $50) + $25 = $150 + $25 = $175

In this context, the Upgrade MRR stands at $175, signifying the additional monthly revenue generated by the customer's upgrade to the standard plan and the inclusion of the $25/month add-on.

Contrarily, Downgrade MRR is the revenue reduction experienced when subscribers transition from their current plan to a lower-tier one during a month. It quantifies the financial impact of customers opting for less expensive subscription options.

To illustrate, suppose a customer initially subscribed to a higher-tier plan valued at $500 per month but subsequently chose to downgrade to a basic plan with a monthly cost of $100. In this scenario, the calculation for Downgrade MRR is straightforward:

Downgrade MRR = $500 (Original Plan) - $100 (New Plan) = $400

The Downgrade MRR, in this case, amounts to $400, indicating the monthly revenue decrease resulting from the customer's switch to a lower-tier subscription plan.

Expansion MRR is the sum of supplementary revenue generated from your existing customer base within a given month, as compared to the preceding month.

This increment results from various customer-centric strategies, including the introduction of add-ons, upselling to higher-tier plans, and cross-selling complementary products or services.

A positive Expansion MRR serves as a testament to your ability to cultivate customer satisfaction and loyalty, which is a boon for your business's profitability. Notably, this revenue source is particularly advantageous as it doesn't entail incurring Customer Acquisition Costs (CAC), which are associated with acquiring new customers.

To gauge the rate of growth in Expansion MRR for a specific month, you can use the following formula:

Expansion MRR Growth Rate (%) = (Expansion MRR in that month / Total MRR at the beginning of the month) x 100

To illustrate this, suppose your business commences the month with a Total MRR of $800,000, and during the course of the month, you accrue an additional $17,000 in Expansion MRR from your existing customer base via add-ons, upsells, and cross-sells.

In this case, the Expansion MRR growth rate per month can be calculated as follows:

Expansion MRR Growth Rate (%) = ($17,000 / $800,000) x 100 = 2.1%

This calculation indicates that your Expansion MRR for the month experienced a growth rate of 2.1%, reflecting the ability to bolster revenue from your existing customer relationships through these supplementary strategies.

Reactivation MRR is the monthly revenue generated when customers who were previously lost or had churned from your services return to a paid subscription plan.

This metric serves as a tangible reflection of the profitability achieved by successfully reacquiring customers who had once ceased their engagement with your offerings.

For instance, let's consider a scenario in which 5 customers who had previously churned decide to reactivate their accounts in the same month. Each of these returning customers subscribes to a $50 per month plan. In this case, your Reactivation MRR for that month would be calculated as follows:

Reactivation MRR = 5 (Number of Reactivated Customers) x $50 (Monthly Subscription Fee)

The Reactivation MRR for the month, in this example, amounts to $250. This signifies the monthly revenue realized from these reactivated customers who have opted for the $50/month subscription, demonstrating the financial benefits of successfully winning back customers who had previously discontinued their engagement with your business.

Contraction MRR is the financial sum your business forfeits due to subscription cancellations and downgrades within a specified month.

This metric encompasses a variety of scenarios that lead to revenue reduction, including customer-initiated cancellations, transitions to lower-priced subscription plans, temporary suspensions, utilization of credits, the application of discounts, or the discontinuation of recurring add-ons.

Contraction MRR, however, differs from Downgrade MRR because it encompasses a broader spectrum of factors contributing to revenue contraction.

To exemplify, let's consider a situation where your business decides to express gratitude to 50 of your long-standing customers by offering them a special discount of $30 for a particular month. In this case, the calculation for Contraction MRR is as follows:

Contraction MRR = 50 (Number of Customers Receiving Discount) x $30 (Discount Amount)

As such, the Contraction MRR, attributed to the discount provided to these 50 customers, amounts to $150. Illustrating how Contraction MRR factors in a range of events and influences that result in a reduction of monthly revenue beyond just downgrades, in this instance, demonstrating the impact of discounts on your business's monthly recurring revenue.

Churn MRR, as can be deduced, is the cumulative revenue your business forfeits as a consequence of subscription cancellations during a designated month. This metric encapsulates the financial impact of customers discontinuing their engagement with your products or services, which can be attributed to a variety of reasons, such as dissatisfaction, changing needs, or other factors.

Consider a scenario in which 3 of your customers, each subscribing to a monthly plan worth $1,000, decide to cancel their subscriptions within the same month. In this case, your Churn MRR for that month is computed as follows:

Churn MRR = 3 (Number of Customers Cancelling) x $1,000 (Monthly Subscription Fee)

The Churn MRR for the month would amount to $3,000, symbolizing the total monthly revenue loss resulting from these 3 customers canceling their subscriptions. Churn MRR serves as an essential metric for understanding and quantifying the financial impact of customer attrition, which can have significant implications for your business's revenue and growth.

Net New MRR serves as a measure for assessing the growth or decline in your revenue compared to previous months. The formula for calculating it is as follows:

Net New MRR = New MRR + Expansion MRR - Churned MRR

A negative value for Net New MRR indicates a loss in revenue, and this occurs when the combined value of your New MRR and Expansion MRR is less than your Churned MRR. Conversely, a positive Net New MRR signifies revenue growth.

For example, let's consider a month in which 5 new customers subscribe to your service, each contributing $100 per month. During the same month, 10 existing customers upgrade from their $100/month plans to higher-tier plans worth $200/month. However, 3 customers, each paying $200/month, choose to discontinue their subscriptions.

In this scenario, your Net New MRR for that month would be calculated as follows:

Net New MRR = $500 (New MRR) + $1,000 (Expansion MRR) - $600 (Churned MRR) = $900

This calculation reveals a Net New MRR of $900 for the month, indicating an increase in your monthly recurring revenue, a result of the new customer subscriptions and existing customer upgrades outweighing the lost revenue from customer churn.

MRR is a fundamental metric for SaaS companies as it offers insights into the financial stability, growth potential, and customer dynamics of the business.

Tracking MRR enables data-driven decision-making and helps in achieving long-term success in the competitive SaaS industry. Here are three main reasons to do so:

A month serves as a reasonable timeframe for evaluating the growth of a subscription-based business. A week is too brief, and a year is overly protracted when it comes to assessing the business's performance.

This is particularly relevant in the subscription model, where customer revenue arrives incrementally each month, as opposed to one-time sales where the entire payment is received at the point of purchase.

Consequently, it is vital to evaluate your business's performance in a manner that mirrors this steady, monthly cash flow, ultimately contributing to the establishment of a sustainable enterprise.

This is where MRR comes into play.

MRR diligently monitors month-to-month trends, offering timely insights into your business's financial performance. These insights aid in gauging progress toward annual revenue targets.

Additionally, reflecting on the year's financial data can assist in establishing pragmatic future objectives, allowing you to leverage your financial resources effectively to attain them.

MRR stands as a fundamental tool for crafting precise sales forecasts and strategizing for both immediate and long-term business development.

Through a diligent examination of your monthly financial performance, you gain the capacity to predict the revenue trajectory for the forthcoming month and, subsequently, make well-informed adjustments to your sales strategies with the aim of augmenting revenue.

For instance, consider a scenario where your company's MRR reaches $90,000 in March. This metric serves as a foundational reference point, allowing you to reasonably infer that you can expect to generate at least $90,000 in sales revenue or potentially more in April.

To refine this forecast, historical growth rates come into play. If your sales consistently exhibit a monthly increase of 6-8%, a standard sales estimate for April would land in the vicinity of $94,800.

MRR is not merely a numerical reflection - it is a dynamic projection of the monthly revenue that flows into your business. Aligning this anticipated revenue with your company's expenses provides you with a precise depiction of the financial resources at your disposal, facilitating informed decisions and the confident allocation of funds for business expansion.

Beyond this, MRR forecasts are instrumental in pinpointing areas where financial investment should be amplified and, conversely, where economies can be achieved.

For example, if your MRR rises this month in comparison to the previous one, but your New MRR demonstrates a decline, it becomes evident that your existing customer base is content with your product. However, it also indicates that there may be room for improvement in attracting new customers to your business.

In response, you can judiciously channel more of your resources into lead-generation campaigns to address this specific challenge.

MRR data plays a pivotal role in empowering investors to make well-informed and astute investment decisions when considering a potential stake in a Software as a Service (SaaS) company.

It offers a comprehensive and detailed lens through which investors can evaluate the company's growth prospects, revenue stability, and its overall appeal as an investment opportunity.

First and foremost, MRR data serves as a barometer for assessing the growth trajectory of the SaaS company. Investors are naturally drawn to businesses with substantial growth potential. By analyzing MRR, they gain valuable insights into how the company is expanding its customer base, increasing revenue streams, and solidifying its position in the market.

A consistently growing MRR indicates not only the ability to attract new customers but also to retain and expand the value of existing ones, which are indicative of a company's promising growth outlook.

Additionally, MRR data provides investors with a window into the company's revenue stability. Unlike one-off transactions where revenue is concentrated at the time of purchase, the subscription-based model, reflected in MRR, offers a steadier and more predictable revenue stream.

This stability is a significant factor in attracting investors, as it signifies a lower level of revenue volatility and a greater degree of financial predictability.

MRR is not just a financial metric. It's a powerful tool that can shape the success and sustainability of your business. It provides a clear, concise snapshot of your company's financial health, growth trajectory, and customer engagement.

Through MRR, you can assess the effectiveness of your sales and marketing efforts, make data-driven decisions, and confidently plan for both short-term and long-term success.

But remember, MRR is not a static number. It evolves as your business does, making it essential to continuously track, analyze, and adapt your strategies based on your MRR data. It's a vital compass that guides you through the ever-changing landscape of the subscription-based business model, helping you achieve financial stability and growth.

So, whether you're a startup looking to attract investors, an established business aiming for sustainable growth, or simply seeking greater financial clarity, MRR is a crucial tool that should not be overlooked.