You have probably heard about MRR on Youtube videos or blog articles, and you want to know more about it?
In this article, we’ll take a closer look at the definition of Monthly Recurring Revenue (MRR). We will also talk about why it’s important, and the different types of MRR that businesses can track.
We’ll also provide a step-by-step guide for calculating MRR and net new MRR. Next we’ll explain the difference between MRR and Annual Recurring Revenue (ARR). Finally we will provide you strategies to increase your MRR.
So whether you’re a subscription-based business looking to optimize your revenue streams or an investor interested in understanding a company’s growth potential, read on to learn more about MRR.
Definition of Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) is a financial metric that measures the predictable and recurring revenue generated by a company’s products or services each month. MRR is typically used by subscription-based businesses that offer recurring services, such as software as a service (SaaS) companies. It can also be used by businesses that sell products with recurring revenue streams, such as maintenance contracts or support agreements.
MRR is an important metric for businesses because it provides visibility into the predictable revenue that a company can expect to generate each month.
This predictability is important for businesses that rely on recurring revenue streams. Indeed, it allows them to better forecast their financial performance and plan for future growth. MRR is also useful for measuring the overall health and performance of a business.
By tracking changes in MRR over time, businesses can identify trends and areas for improvement.
Quick example: Your service costs 100€/month, and you have 500 customers for it. Then, your Monthly Recurring Revenue is 50 000€. You will find other calculations below.
Why is MRR important?
Monthly Recurring Revenue (MRR) is important for businesses for several reasons:
- Predictable revenue streams: MRR provides businesses with predictable revenue streams that they can rely on each month. This is especially important for subscription-based businesses that rely on recurring revenue to sustain their operations.
- Financial forecasting: By tracking MRR, businesses can better forecast their financial performance and plan for future growth. This can help businesses make more informed decisions around hiring, investment, and resource allocation.
- Performance measurement: MRR is a useful metric for measuring the overall health and performance of a business. By tracking changes in MRR over time, businesses can identify trends and areas for improvement. For example, if MRR is declining, it may indicate that customers are cancelling their subscriptions or that the business is having difficulty acquiring new customers.
- Business valuation: MRR is also an essential metric for businesses that are looking to raise capital or sell their business. Potential investors or acquirers will look at a company’s Monthly Recurring Revenue to determine its revenue potential and growth prospects.
- Customer lifetime value (CLTV): MRR is closely tied to a customer’s lifetime value (CLTV). By tracking MRR and understanding how it is impacted by customer acquisition, retention, and expansion efforts, businesses can better understand their CLTV and identify ways to increase it.
The different types of Monthly Recurring Revenue
This type of MRR represents the revenue generated by new customers who have recently subscribed to a company’s products or services. New MRR is important for businesses that are focused on growth and customer acquisition. It provides insight into the success of their sales and marketing efforts.
This type of MRR represents the additional revenue generated from existing customers who have upgraded to a higher-tiered subscription or added new products or services to their existing subscription. Expansion MRR is important for businesses that are focused on customer retention and increasing customer lifetime value (CLTV).
This type of MRR represents the revenue lost due to customer cancellations or downgrades. Churn MRR is critical for businesses that are focused on reducing customer churn rates and improving customer satisfaction.
How to Calculate MRR?
It is very simple to calculate MRR. Here is the formula:
Where ARPU is the Average Revenue Per User.
For example, if a SaaS company has 1.000 active subscriptions with an Average Revenue Per User of 50€, its MRR would be 50.000€ (1.000 subscriptions x 50€ ARPU).
It’s indispensable to note that MRR can be impacted by changes in the number of active subscriptions, changes in ARPU, or a combination of both. Therefore, businesses should regularly track and analyze changes in both of these metrics to gain a deeper understanding of their MRR and overall financial performance.
How to calculate net new MRR?
It is a metric used to track the growth in a company’s recurring revenue streams from new customers or upgrades, while considering any revenue lost from customer churn or downgrades. The formula for calculating Net New MRR is:
This provides a net total of the monthly recurring revenue generated by new customers or upgrades. Indeed, you taking into account any revenue lost from customer churn or downgrades.
For example, let’s say a SaaS company had the following MRR changes over the course of a month:
- New MRR: 10.000€
- Expansion MRR: 5.000€
- Churn MRR: 2.000€
To calculate Net New MRR, we would use the formula:
Net New MRR = New MRR + Expansion MRR – Churn MRR Net New MRR = 10.000€ + 5.000€ – 2.000€ Net New MRR = 13.000€
Therefore, the company’s Net New MRR for the month would be 13.000€. This indicates that the company generated 13.000€ in new recurring revenue during the month, while taking into account any revenue lost from customer churn or downgrades.
What is the difference between MMR and ARR?
Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are both metrics used to measure a company’s recurring revenue streams. They differ in the period over which they are calculated.
First, MRR is the revenue generated by a company’s subscription-based products or services each month. It is typically used by businesses that have monthly subscription plans. It is calculated by multiplying the total number of active subscriptions by the average revenue per user (ARPU). MRR provides businesses with a more granular view of their recurring revenue streams. This allows them to track changes in revenue on a monthly basis.
Then, ARR, on the other hand, is the revenue generated by a company’s subscription-based products or services over the course of a year. It is typically used by businesses that have annual subscription plans. It is calculated by multiplying the total number of active subscriptions by the annual subscription price. This type of revenue provides businesses with a longer-term view of their recurring revenue streams. This allows them to track changes in revenue on an annual basis.
Of course, businesses can convert MRR to ARR by multiplying MRR by 12, and they can convert ARR to MRR by dividing ARR by 12.
You can also watch this explanatory video 👇:
How can you increase your MRR?
There are several strategies that businesses can use to increase their Monthly Recurring Revenue (MRR). Here are some examples:
- Increase pricing: One of the most easy ways to increase MRR is to raise prices. However, it’s important to ensure that the increased prices are still competitive and provide value to customers.
- Upsell and cross-sell: Encouraging existing customers to upgrade their subscriptions or purchase additional products or services can help increase MRR. This can be achieved through targeted marketing campaigns and personalized recommendations based on customer behavior.
- Reduce churn: Reducing customer churn rates can help businesses retain their existing revenue streams and avoid the need to acquire new customers to make up for lost revenue. This can be achieved through improving customer service and support, providing additional value to customers, and addressing customer concerns in a timely manner.
- Improve customer acquisition: Acquiring new customers is essential for growing MRR. Businesses can improve customer acquisition by optimizing their marketing and sales processes, targeting the right audience, and providing a great customer experience.
- Offer annual subscriptions: Encouraging customers to sign up for annual subscriptions instead of monthly subscriptions can help increase MRR. This is because annual subscriptions typically offer a discount and provide more predictable revenue over a longer period of time.
- Launch new products or features: Introducing new products or features that provide additional value to customers can help increase MRR. This can be achieved through customer research and feedback, and by identifying areas where the business can differentiate itself from competitors.
In conclusion, Monthly Recurring Revenue (MRR) is a financial metric that measures the predictable and recurring revenue generated by a company’s products or services each month.
MRR is important for businesses that rely on recurring revenue streams, as it allows them to better forecast their financial performance and plan for future growth. By tracking changes in MRR over time, businesses can identify trends and areas for improvement.
There are several types of MRR, including New MRR, Expansion MRR, and Churn MRR, and businesses can calculate their net MRR by subtracting Churn MRR from New MRR and Expansion MRR.
MRR is similar to Annual Recurring Revenue (ARR), but differs in the period over which it is calculated.
Businesses can increase their MRR by strategies such as increasing pricing, upselling and cross-selling, reducing churn, improving customer acquisition, offering annual subscriptions, and launching new products or features.
By understanding and improving their MRR, businesses can achieve more predictable revenue streams, better financial forecasting, and improved overall performance.
You can read our previous article on How to Make a Successful Mobile App for Your Startup?
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