Monthly Recurring Revenue (MRR) is a standardized measure of predictable (recurring) revenue that a business expects to earn monthly. It includes recurring fees, monthly payments resulting from discounts, coupons, and recurring add-ons but does not include one-time expenses.
Monthly Recurring Revenue calculations are mainly used in SaaS and subscription based business models.
Table of contents
- Why is Monthly Recurring Revenue (MRR) important?
- How to improve Monthly Recurring Revenue?
- Benefits of Monthly Recurring Revenue (MRR)
- How to simply calculate Monthly Recurring Revenue (MRR)?
- How to calculate different types of monthly recurring revenue?
- Net Monthly Recurring Revenue (MRR) calculation
- Gross Monthly Recurring Revenue (MRR)
- Monthly Recurring Revenue (MRR) vs. Annual recurring revenue (ARR)
- Difference between booking and MRR
- MRR in subscription based business models
Monthly Recurring Revenue (MRR) is a great way to track how different customer pricing plans and billing periods contribute to the success of a business. If businesses calculate and track MRR, they can predict recurring revenue over a certain period and see the overall business behavior.
MRR can increase or decrease depending on the month. New customers represent an increase in MRR, while downgradings and subscription cancelations affect the decrease.
Downgrading and canceling memberships both result in a reduction of MRR – or lost monthly revenue.
However, cancellations are far more damaging to the company than downgrades.
After downgrading, with proper customer care, a customer can upgrade again. Once a customer cancels a subscription, and it takes much more effort to bring him back.
Monthly recurring revenue calculation can give a business a crucial overview of whether the company is growing or not.
Why is Monthly Recurring Revenue (MRR) important?
Tracking MRR is important because:
- It tells a business exactly how much income they can generate each month
- It makes it easier to plan for the future
- It enables a business to make smarter decisions
- It allows companies to implement revenue growth management
- It predicts revenue churn
- It provides an insight into Customer Lifetime Value (CLV)
How to improve Monthly Recurring Revenue?
If subscription based businesses want to increase their profits, they should first consider how to grow their MRR.
There are several ways to increase their monthly revenue:
- Increase the subscription price
- Upsell customers by offering various services at a higher price
- Remove a “maximum” price, freemium model, and similar price variations
- Reduce churn
Benefits of Monthly Recurring Revenue (MRR)
The main benefit of MRR is that it provides predictable revenue insight to businesses of a monthly cash flow. It gives a better handle on objectives and income so companies can operate their budget easier. In other words, businesses can approximately predict how much revenue they will acquire throughout a specific period.
Monthly Recurring Revenue management
Many businesses still work on outdated technology, making monthly recurring revenue calculations hard. To properly track and analyze MRR, some companies must update their billing software with one that includes a revenue management system.
Using a cloud-based billing and revenue management software like the one incorporated in Tridens Monetization is the recommended solution in terms of cost and implementation time.
How to simply calculate Monthly Recurring Revenue (MRR)?
Every business can calculate its MRR relatively easily. It needs to multiply the number of monthly subscribers by the average revenue per user. Suppose a company has 200 customers paying $40 monthly for the service.
The monthly recurring revenue (MRR) calculation formula is:
Number of subscribers * Monthly subscription fee = MRR
200 * $40 = $8000
If a business offers multiple subscription plans, they can calculate each one individually or consider the average billed amount. For instance, 300 customers paying an average of $20 per month would mean an MRR of $6000.
Number of subscribers * average billed subscription amount = MRR
300 * $20 = $6000
How to calculate different types of monthly recurring revenue?
Although simple to understand and calculate, there are different types of monthly recurring revenue calculations. As your subscription business expands, it will be critical to measure not only your top-level MRR but also the reasons that contribute to the change in your MRR over previous months.
New customers MRR
New customers MRR is the revenue that new customers acquired during the month generate. If a business has 200 existing customers who pay a $40 fee and 15 new join, the new customers MRR calculation formula is:
Number of new subscribers * Monthly subscription fee = New customers MRR
15 * $40 = $600
In the month in question, new customers contributed $600 to the total monthly revenue of the company.
In most cases, it is almost impossible to retain all customers. Reactivation MRR is the monthly recurring revenue from returning previous customers. Because of this, the reactivation MRR is an incredibly satisfying metric to track. Basically, it is the revenue gained from previously churned or canceled subscriptions that were reactivated during the month. To calculate reactivation MRR a business needs to sum MRR from customers previously churned.
For example, five customers each had a $40 plan. They had canceled their subscription last month but reactivated it this month. The total reactivation MRR calculation formula is:
Number of returning subscribers * Monthly subscription fee = Reactivation MRR
5 * $40 = $200
The returning customers generated $200 in additional revenue for that month.
The expansion MRR rate is a measure that indicates how quickly a company’s monthly recurring revenue (MRR) grows from month to month.
Expansion MRR does not include any revenue from new clients. Expansion MRR only considers revenue from upgrades, cross-sell, add-ons and reactivations.
Let’s say a business had an MRR of $8000 at the beginning of the month. At the end of the month, MRR with expansion was $11.000.
The expansion MRR calculation formula is:
end of the month MRR – beginning of the month MRR = Expansion MRR
$11.000 – $8000 = $3000
The expansion MRR can also be expressed as the Expansion MRR percentage rate:
[(end of the month – beginning of the month) / beginning of the month] x 100 = Expansion MRR percentage rate
[($11.000 – $8000) / $8000] * 100 = 37,5%
Cancellation or Churn MRR
Cancellation MRR also called Churn MRR, is the number of customers who choose to cancel a subscription each month. If a business loses 50 customers who were paying $40 per month, the Churn MRR calculation formula is:
Number of canceled (churned) subscriptions * Monthly subscription fee = Reactivation MRR
50 * $40 = $2000
In this case, $2000 is the amount of monthly recurring revenue the company lost from customer churn that month.
Downgrade (Contraction) MRR
Downgrade MRR or Contraction MRR represents the monthly revenue that a company loses because of downgrades. Let’s assume a company offers a basic monthly subscription for $10 and a premium subscription for $40. If five customers downgrade from premium to the basic $10 plan, the downgrade MRR calculation formula is:
Number of downgraded subscriptions * Difference in subscription fee = Downgrade MRR
5 * ($40-$10) = 5 * $30 = $150
This month, the company lost $150 from customers’ downgrades.
Net Monthly Recurring Revenue (MRR) calculation
As the subscription business expands, it is important to measure not only new or churn MRR but also all the factors contributing to the MRR change.
Only when we combine all MRR calculations we can get an accurate picture of what is happening with our MRR and why.
In order for a company to make informed business decisions, it must look at its Net monthly recurring revenue.
Net monthly recurring revenue is the sum of existing, upgraded, and newly acquired accounts while simultaneously subtracting the value lost from closed or downgraded accounts.
Let’s say the existing MRR is $8000, new MRR is $2000, reactivation MRR is $200, expansion MRR is $500, churn is $500, and downgrade MRR is $150. The net MRR calculation formula is:
New customers MRR + reactivation MRR + expansion MRR – churn MRR – downgrade MRR = Net MRR
$600 + $200+ $3000 – $2000 – $150 = $1650
How to calculate Net MRR Growth Rate?
The Net MRR Growth rate compares the current Net MRR with the Net MRR from the previous month. With this KPI, the company can monitor if the month-to-month business is successful and in line with its business plans and forecasts.
The Net MRR Growth rate calculation formula is:
[(Current Net MRR – last month’s Net MRR) / last month’s Net MRR] x 100 = Net MRR Growth Rate
[$1650 – $1000 / $1000] x 100 = 65%
The total Net MRR for this month is $1650 and the Net MRR Growth rate compared to the previous month is 65%.
Gross Monthly Recurring Revenue (MRR)
Gross monthly recurring revenue (MRR) is a business’s total monthly revenue with recurring payments. It’s a sum of existing revenue at the beginning of the month and Net monthly recurring revenue in that month. The gross monthly recurring revenue formula is:
Existing MRR + Net MRR = Gross MRR
$8000 + $1450 = $9450
The total Gross MRR for this month is $9450.
Monthly Recurring Revenue (MRR) vs. Annual recurring revenue (ARR)
Sometimes, especially in SaaS business models, some companies may track only ARR, only MRR, or even mix one or another and create confusion.
But ARR is not only MRR multiplied by 12 months. Annual recurring revenue measures revenue over a year rather than a month, whereas MRR measures recurring revenue generated each month.
ARR is used to forecast annual recurring revenue for the next 12 months, assuming no changes happen to your customer base. Annual recurring revenue is more appropriate for determining long-term revenue, while MRR helps in short-term evaluation.
For more information, please read our blog on annual recurring revenue.
Difference between booking and MRR
Booking is a measure that shows the monetary value of a deal made with a prospective customer for a specific period. According to the revenue recognition principle, a booking is considered the total of all revenue promised to the company. Bookings represent customers’ commitment to pay for the services or products and don’t necessarily require a contract. The contract is usually unnecessary since it works on a “promise” principle. When a customer makes a booking, it’s not considered revenue because no service has been performed yet. Also, at that moment, the business didn’t collect any money yet, so the contract was just booked, not realized.
MRR, on the other hand, only takes into account signed contracts that ensure the revenue will be collected monthly. With MRR, one-twelfth is recognized each month throughout a 12-month contract. MRR needs to be turned into a monthly, recurring payment, usually spread out over the year. Monthly recurring revenue provides the picture of predictable revenue and encourages an ongoing relationship between the business and customers.
MRR in subscription based business models
The subscription business model is based on the contract between a business and the customer. The customer agrees to make recurring payments for service for a set period, and the company provides those services on time. The company will keep providing services if the customer respects this schedule.
Businesses such as Microsoft 365 offer both annual and monthly subscriptions. Microsoft 365 offers solutions for companies and individuals who want to use these services to prosper in their work. The main difference between the monthly and annual subscription models is the price.
Customers who want an annual family package have to pay $99,99.
If we divide $99,99 by 12 months, we will get the price of $8,33 per month. Customers get this price only if they take an annual subscription. If they opt for a monthly subscription, they would have to pay $9,99 per month. So the difference between monthly and yearly subscriptions would be almost $2. Microsoft is aiming to persuade their customers to take annual subscriptions to “save money” when in fact, this is the tactic to retain and bind customers for a more extended period.
On paper, a monthly subscription is better for the business’s revenue since the price is higher. But only if they keep using the product for an entire year without downgrades and cancelations.
With a yearly subscription, a business can be sure to retain the customer for at least a year, thus having higher customer retention.
Only with a proper monthly recurring revenue calculation can a business see if its decision to offer monthly and discounted yearly subscriptions are justified.
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