What is Monthly Recurring Revenue?
Monthly recurring revenue (MRR) in the context of SaaS (software as a service) is calculated by multiplying the number of subscribers with their recurring price.
How to measure MRR?
Recurring revenue is a business model that revolves around selling subscriptions to users. Instead of selling a product or a service, you only sell the right to use your product or the service at a given price over the time frame of the subscription. While many businesses deal with projects where revenue comes in discretely (once and never again) most SaaS products engage with customers who subscribe to our services on a regular basis.
To measure MRR, you'll begin by establishing how many paying customers you currently have, and at what price points they're paying per month. Multiplying these two factors will result in establishing the revenue that you're bringing in month over month.
What does monthly recurring revenue mean?
Monthly recurring revenue (MRR) is a phrase that online businesses use to describe the amount of money they expect to receive from their subscribers each month. It is defined as the total amount of subscription fees for an entire month, in advance. This number is typically calculated by adding up all of the monthly fees from all of your customers who subscribe to a service or product (subscriptions).
MRR, especially in the context of SaaS is often an indicator of company growth and success. For many, it's a "north star metric" meaning all company goals and activities are dedicated to increasing MRR or hitting a MRR benchmark.
Different Types of MRR
Tracking month recurring revenue provides many insights into the business and its health. However, given how complex pricing models can get and how different factors can impact MRR, it's important to understand what different types of MRR are, and how their expansion or contraction impact your company.
- New MRR. This is the additional revenue that comes from new customers during a month. For example, if you acquired 10 new customers who have agreed to pay $500 a month, your new MRR would be $5000.
- Upgrade or upsell MRR. This is the revenue that results from current customers upgrading to a more expensive plan or service from their current plan. Upgrade MRR is the price difference between the original plan and upgraded plan, multiplied by the number of users who upgraded.
- Downgrade MRR. This is the revenue lost as a result of subscribers going from a more expensive plan or subscription, to a cheaper one.
- Churn MRR. This is the revenue lost as a result of subscription or users cancelling.
Why is it important to measure MRR?
Tracking MRR is essential because it not only measures the growth of an organization, but the losses and areas for improvement. If MRR is tracked regularly and correctly, it'll provide valuable insights into the past, current state, and future of a business.
- Tracking MRR helps budgeting
- Tracking MRR helps quantify success and failure.
- Tracking MRR is an ideal method for predicting revenue and profits.