Monthly Recurring Revenue (MRR) Explained in 5 Mins or Less

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As an expert in data analytics and recurring revenue models, I want to provide you with a comprehensive guide on monthly recurring revenue (MRR)—one of the most critical metrics for any subscription-based business.

Tracking and optimizing MRR can transform the way you manage cash flow, forecast growth, and make strategic decisions. With the right MRR strategies, you can take your subscription business to the next level.

In this detailed guide, you’ll discover:

  • What MRR is and why it’s so important
  • How to accurately calculate MRR
  • Common MRR mistakes that distort revenue data
  • 5 types of MRR metrics to track
  • MRR benchmarks for SaaS businesses
  • 10 ways to leverage MRR data
  • 7 proven strategies for increasing MRR

I’ll share insights from my experience helping analyze and optimize recurring revenue for SaaS companies. My goal is to ensure you have a complete understanding of MRR and how to use it to spur sustainable growth.

Let’s dig in!

What Is Monthly Recurring Revenue?

Monthly recurring revenue (MRR) refers to the predictable revenue a business can expect to generate from existing, paying subscribers each month. The key elements are:

  • Recurring: MRR includes ongoing revenue streams from subscription payments that repeat each billing cycle.

  • Monthly: MRR is calculated on a per month basis, not annually or daily.

  • Existing subscribers: MRR only includes revenue from current users, not new customer acquisition.

For example, a SaaS company with 100 customers paying $10 per month has an MRR of $1,000. If 5 customers churn, the next month‘s MRR would be 95 * $10 = $950.

In contrast, revenue from one-time setup fees, professional services, new sales, etc. are not included in pure MRR calculations.

Why Is MRR So Important?

For subscription businesses, MRR is arguably the most important metric to track. Here’s why it matters so much:

  • Forecasting: MRR helps accurately predict recurring revenue and cash flow needs months or years out.

  • Stability: MRR smooths out dips and spikes in monthly revenue based on new sales. This models the predictability of recurring subscriptions.

  • Business health: Rising MRR indicates a growing subscriber base. Falling MRR could signal issues with product-market fit, churn, pricing, etc.

  • Valuations: MRR and Annual Recurring Revenue (ARR) are often used as valuation multiples for SaaS businesses.

  • Benchmarks: MRR provides an objective benchmark for measuring subscriber growth and business performance over time.

That’s why savvy SaaS operators obsess over tracking and optimizing MRR—it’s a core indicator of the health and growth of a subscription business.

Now let’s look at how to accurately calculate MRR for your business…

How to Calculate Monthly Recurring Revenue

The formula for calculating MRR is simple:

MRR = Average Recurring Revenue Per Account x Number of Subscribers

For example:

  • Company A has 100 paying subscribers
  • Each subscriber pays $10 per month
  • Company A‘s MRR = 100 * $10 = $1,000

To determine MRR on an ongoing basis, you need:

  • Average revenue per account (ARPA)
  • Total number of active subscribers

Plug those figures into the formula each month to calculate your recurring revenue.

Most subscription management platforms and billing systems can automate your MRR calculations based on subscriber data. This lets you view dynamic MRR alongside key SaaS metrics like customer churn and new customer growth.

Types of MRR to Track

As your subscriptions business scales, you need visibility into the components driving your total MRR. Here are 5 types of monthly recurring revenue to track:

1. New MRR

New MRR represents revenue from newly acquired subscribers in a given month. For example, if you gain 25 new customers paying $20 per month, your New MRR would be 25 * $20 = $500.

Measuring New MRR shows how much expansion comes from acquiring new accounts each month. You can compare this to subscriber acquisition costs to analyze return on investment.

New MRR helps answer: How much recurring revenue is driven by new subscriber growth?

2. Expansion MRR

Expansion MRR comes from existing subscribers paying for upgrades or additions like:

  • Larger product packages
  • Add-ons
  • Premium features

Tracking expansion MRR reveals opportunities to increase revenue from your current customer base. For example, you may find customers that use core features heavily are primed for paid add-ons.

Expansion MRR helps answer: How much recurring revenue is driven by upsells to existing subscribers?

3. Reactivation MRR

Reactivation MRR measures revenue from previously churned subscribers who rejoin your service. Analyzing this metric can uncover opportunities to improve churn and win back lost accounts.

For instance, if 50 past customers resubscribe and generate $1,000 in MRR, you’ve reactivated $1,000 in MRR that month.

Reactivation MRR helps answer: How much recurring revenue comes from winning back churned subscribers?

4. Contraction MRR

Contraction MRR refers to any decreases in MRR from existing subscribers, such as:

  • Downgrades to lower priced plans
  • Discounts
  • Service changes

Tracking contraction MRR helps identify causes of revenue leakage or dissatisfaction among current users.

Contraction MRR helps answer: How much recurring revenue is lost each month from existing subscriber contractions?

5. Churned MRR

Churned MRR represents the MRR lost when subscribers cancel their accounts completely. Analyzing churned MRR helps quantify customer retention rates and lifetime value.

For example, if you lose 50 customers with $100 MRR, your churned MRR that month is 50 * $100 = $5,000.

Churned MRR helps answer: How much revenue is lost altogether when subscribers churn each month?

Segmenting overall MRR across these categories provides visibility into the health and momentum of your recurring revenue streams.

Now let’s look at some common mistakes to avoid when calculating MRR…

Common MRR Calculation Mistakes to Avoid

Because MRR is so essential for subscription businesses, it’s crucial to measure it accurately. Here are some common mistakes that can distort your monthly recurring revenue data:

Mistake #1: Including One-Time Fees in MRR

One-time payments like setup fees, professional services, and the initial month of annual contracts should not be counted as monthly recurring revenue.

While they are revenue, these are not long-term repeatable revenue streams. Including them will inflate your true MRR.

Mistake #2: Counting Revenue Before Customer Renewal

With new customers, only count their revenue value after the first renewal occurs. Until they complete a full billing cycle, don’t consider it MRR.

Prematurely including signups that may not renew will swell your MRR calculations artificially. Wait for at least one renewal.

Mistake #3: Including Free Trial Users in MRR

Similarly, customers within free trials should not be counted in MRR. Only paying subscribers that have converted from free trials contribute to monthly recurring revenue.

Mistake #4: Improper Annual Contract Accounting

When annual contracts are paid upfront, divide by 12 months rather than allocating to one month‘s MRR. This smooths the impact over the full contract term.

Mistake #5: Missing Contraction MRR from Downgrades

Don’t forget to deduct revenue losses from downgrades, discounts, and other contractions from existing subscribers. This offsets gains to accurately calculate net MRR.

Avoiding these common MRR mistakes ensures you have an accurate picture of your true recurring revenue growth over time.

Now let’s explore how to leverage your MRR data to make smart business decisions…

10 Ways To Use MRR Data To Grow Your Business

Calculating MRR is only half the battle—you need to actually use those metrics to guide business strategy.

Here are 10 ways to leverage MRR data for growth:

1. Forecast Cash Flow Needs

Knowing your MRR provides visibility into future cash flow. Multiply MRR by 12 to estimate Annual Recurring Revenue (ARR). This shows the annual runway current subscriptions provide.

Compare ARR to operating costs to ensure profitable growth. Shortfalls indicate a need to improve sales or cut expenses.

2. Set Growth Benchmarks

Plot MRR over time and set goals for monthly, quarterly or annual growth. For example, target 10% QoQ MRR growth or $500k ARR by 2025. This quantifies business growth objectives.

3. Monitor Business Performance

Rising MRR indicates growing subscribers and retention. Declining or stagnant MRR signals potential problems. Set alerts for MRR thresholds to monitor performance.

4. Identify Upsell Opportunities

Analyze which customer segments have the highest expansion MRR. Find overlap in usage patterns and target those prime for upsells.

5. Enhance Retention

Review churned MRR reports to identify issues driving cancellations. Survey churned customers for feedback to improve retention.

6. Optimize Pricing Strategy

Test higher pricing tiers if MRR remains steady despite increases. Lower pricing if contraction rises during hikes.

7. Double Down on Highest LTV Customers

Calculate LTV by segment and focus retention programs on high LifeTime Value cohorts uncovered.

8. Budget Marketing Spend

Ensure marketing costs to acquire customers align with the expansion MRR generated. Tweak programs to optimize return on ad spend.

9. Forecast Staffing Needs

Project team growth needs based on MRR expansion goals. Hire to scale customer success and engineering as MRR grows.

10. Value Your Business

Leading valuations like 5X-10X ARR depend on accurate MRR figures. This impacts external funding and potential exit value.

Getting granular with your MRR metrics uncovers key insights to inform strategic decisions. But simply tracking MRR is not enough—you need strategies to actively increase it…

7 Proven Strategies for Increasing Monthly Recurring Revenue

The lifeblood of any subscription business is expanding monthly recurring revenue. Here are 7 proven tactics to pump up MRR:

Tactic #1: Structure Smart Promotions

Limited-time sales, seasonal offers, and other promotions attract new subscribers. Just be sure to grandfather existing users at full price after promotions expire.

Promotions add New MRR efficiently when crafted carefully. Avoid devaluing your core pricing.

Tactic #2: Offer Multiple Pricing Plans

Provide tiers (Basic/Pro/Enterprise) at increasing price points. Upsells to premium packages are a major MRR expansion lever.

Present clear upgrade paths when subscribers receive enough value. Make upgrading frictionless.

Tactic #3: Develop Valuable Add-ons

Additional products, features, and services boost revenue from existing users. Prioritize expanding MRR from current customers with add-ons before acquiring new customers.

Tactic #4: Create an Affiliate/Referral Program

Give current subscribers incentives to refer others. Word-of-mouth converts more easily. Build a salesforce of brand evangelists.

Tactic #5: Automate Upsells

Prompt upgrades at sign up, after onboarding, upon renewals, and other touchpoints via lifecycle emails and in-app messages. Time triggers to increase conversion.

Tactic #6: Improve Customer Retention

A 5% bump in retention can increase long-term MRR by 25-95% 1. Optimize onboarding, support, UI, and ease of use to keep subscribers engaged.

Tactic #7: Structure Enterprise Plans

Dedicated Enterprise packages with premium support, SLAs, and additional features cater to high-value customers. Enterprise plans drive substantial expansion MRR.

Getting creative with these MRR growth levers provides a sustainable and scalable way to expand recurring revenue.

Now let‘s examine some example MRR benchmarks to shoot for…

Healthy MRR Benchmarks for SaaS Businesses

Wondering what a “good” MRR amount is for different stages of SaaS businesses?

Here are some average MRR benchmarks based on a survey of over 200 private SaaS companies 2:

Company Stage Average MRR
Pre-seed $5,000
Seed $15,000
Early $45,000
Growth $245,000
Scale $1,500,000

Obviously, ideal MRR varies widely depending on your market, pricing, overhead and other factors.

But these benchmarks provide ballpark figures to evaluate whether your SaaS is generating enough monthly recurring revenue at your current stage of growth.

Shoot for the average or higher in your stage to sustainably fund operations and expansion. Lagging too far behind these MRR benchmarks could signal problems.

Key Takeaways

To quickly recap everything we’ve covered:

  • MRR is the predictable, recurring revenue from existing subscribers each month. It’s a core SaaS growth metric.

  • Calculate MRR by multiplying average revenue per account by total subscriber count. Automate via subsription management platforms.

  • Categorize MRR into new, expansion, reactivation, contraction, and churned buckets.

  • Avoid common errors like including one-time fees or prematurely counting new subs as MRR.

  • Use MRR data to forecast growth, cash flow, budgets, pricing strategy, churn reduction, and valuations.

  • Tactics for raising MRR include smart promotions, pricing tiers, add-ons, referrals, lifecycle upsells, and improved retention.

  • Benchmarks help evaluate if MRR is on track for different stages of SaaS businesses.

Now you have a complete guide to MRR for scaling recurring revenue. Mastering monthly recurring revenue metrics can transform the way you operate and grow your subscription business.

I hope these frameworks, data-driven insights, and expert perspectives equip you to unlock the full potential of MRR. Feel free to reach out if you need any help tracking or optimizing recurring revenue.

Here‘s to your success!

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