Every business is interested in how much revenue they generate each month, but not all businesses have a recurring revenue model. What is monthly recurring revenue (MRR), and why is it so important to SaaS businesses?
What is MRR?
Monthly recurring revenue (MRR) is the amount of money a business gets from its subscription customers, recognized on a monthly basis. Every business is interested in how much revenue they generate each month, but not all businesses have a recurring revenue model.
In a recurring revenue model, the customer usually pays in installments over the period of a contract. Sometimes they pay once (usually at the start of the contract term) but for financial reporting purposes, the revenue is recognized at intervals over the duration of the service.
Why is MRR an important SaaS metric?
As most SaaS businesses use a subscription model, MRR is important for two main reasons:
- It's an indicator of growth or contraction on a short-term (i.e. monthly) basis.
- It's a predictor of future revenue, which makes it a key input for projecting cash flow and profitability.
Though MRR is an important metric for every SaaS business, some prioritize it more than others. A startup targeting rapid user growth may, for instance, prioritize user volume over MRR in the short term.
Another example could be a company that is looking to launch in a new market - they may choose to take a hit on their MRR to focus on acquiring new subscribers. For SaaS businesses that are looking to scale an existing subscriber base, MRR is a key metric of success.
How to calculate MRR
There is no single way to calculate MRR but the most straightforward way is by multiplying the monthly value of a subscription with the number of subscribers.
500 customers, paying $10 per month = an MRR of $5,000
50 customers, paying $750 per year = an MRR of $3,125
This approach is fine if all your customers are on exactly the same subscription - but that’s never the reality. Even a mid-sized SaaS company can have thousands of customers across multiple products and different price points. Another way of working out MRR is to total the monthly revenue of each customer. But that can be impractical, for the very same reason.
A standard compromise is to normalize the monthly revenue of all your subscribers first. In this approach, you multiply the monthly Average Revenue Per User (ARPU) by the number of subscribers.
Like many other SaaS metrics, MRR has variations depending on the insights you're after. These can be expressed as actual financial numbers, or as percentages (compared to the month before) to show rates of growth or decline.
Annual Recurring Revenue (ARR): ARR is the same as MRR, but with revenue measured over a year rather than a month. They are often used together, as ARR is able to smooth out short-term fluctuations in MRR due to isolated events to show more accurate longer-term trends. ARR is also important when you’re selling multi-year contract terms.
New MRR: The MRR from only your new subscribers. When put against Customer Acquisition Cost (CAC) it will show the profitability of your new subscribers.
Expansion MRR: The additional MRR generated from existing subscribers, usually as a result of an upgrade or renewal at a higher price. Typically this does not include subscribers who converted from a free trial, as these would be counted as new MRR.
Reactivation MRR: The monthly revenue earned from previously churned or canceled subscriptions that are reactivated during the month.
Contraction MRR: The total reduction in MRR due to downgrades and subscription cancellations compared to the previous month. When expressed as a percentage, this is known as ‘Churn MRR’.
Net MRR: The combination of New, Expansion, Reactivation, and Contraction MRR. This gives an overall picture of how MRR is changing. MRR often begins with Net MRR, before digging into its constituent parts. When expressed as a percentage, this is known as ‘Net Revenue Retention’.
Keep these definitions for reference with our MRR factsheet. Download it now.
What is a good MRR rate?
Like all SaaS metrics, benchmarking MRR can be difficult as performance varies by markets, customer demographics, and stage of business. Here are some helpful guides.
- Startups and young companies should be targeting higher MRR growth rates:
ARR below $2.5m - +100% MRR
ARR between $5-15m - 45% MRR
ARR between $25-75m - 35% MRR
ARR over $75m - 23% ARR
- Benchmarking against monthly ARPU is also a useful method. Again, the basic rule is the lower your comparative number, the higher MRR rate you should expect:
ARPU below £15k - 47% MRR
ARPU between $25-100k - 41% MRR
ARPU between $100-250k - 31% MRR
ARPU over $250k - 23% MRR
- Clearly, the more you are spending on marketing and advertising, the higher rate of MRR you should expect:
Spend less than 20% of revenue - 21% MRR
Spend 20-40% revenue - 24% MRR
Spend 40-60% revenue - 29% MRR
Spend over 60% revenue - 73% MRR
- Sales channel also impacts the MRR you can expect:
Via third-parties and affiliates - 53% MRR
Inside sales - 49% MRR
Online - 46% MRR
Field sales - 30% MRR
(All data source: KeyBank SaaS Survey Results 2019)
What MRR doesn’t measure
Most standard measurements of MRR only take into account committed revenue. That is the money a customer has already spent on their subscription and is being recognized on a monthly basis or the money they will spend each month for their subscription for the duration of their contract term.
But looking at MRR in isolation can be misleading; it’s important to understand the context. Not every customer starts off paying full price. Some will be lured by a discount period, while at the other end loyal customers may be rewarded with the same. And it’s not uncommon for subscribers on the verge of churning to be sweetened by a temporary halt on their payments. All of this will reduce MRR in the short term, but for good reasons.
Or things can go the other way. SaaS businesses can make money outside of subscription revenue; a subscriber may make a one-off purchase, like the cost of setup, technical support for an incident, user training, or new feature enablement. MRR does not take into account these kinds of purchases, but they are clearly contributors to and measures of revenue growth.
Another consideration for calculating MRR is when in the month you recognize the revenue. For annual or multi-year subscriptions where revenue is being recognized monthly, a SaaS business has control over what day that happens. But where customers pay on a monthly basis, the billing date is normally determined by when the customer took out the contract. So revenue will be recognized all through the month, meaning your MRR will fluctuate depending on what day you assess it.
Other key metrics to use with MRR
It’s never a good idea to look at any SaaS metric by itself. By combining MRR with other SaaS metrics, you get a more complete picture of business performance. Here are three metrics to consider:
Customer Lifetime Value (CLV): CLV is the revenue (or sometimes profit) you can expect to receive from a subscriber over the course of their custom. As a predictive metric, it can be a complex calculation depending on what variable you use to define ‘value’. Using MRR as that value should provide a more accurate result.
Churn: Typically you’d expect high churn to result in falling MRR. But sometimes MRR can rise on the back of lower subscriber numbers if those remaining customers are paying more. This can be a useful test of the price elasticity of your product. Likewise, stable churn and improving MRR (with no price increase) is a signal that your customers are upgrading or expanding their subscription with you, which may negate spending on new customer acquisition. Read more about MRR and churn.
Net Revenue Retention (NRR): NRR (sometimes known as Net Dollar Retention - NDR) takes into account current customers who downgrade, pause, or reduce their consumption alongside those who churn. NRR is expressed as a percentage, with anything under 100% showing revenue contraction. It is an important predictor of how much your business could continue to grow from your current customer base alone. The adoption of NRR as the key recurring revenue metric marks a shift in SaaS strategy from growth at all costs to sustainable growth.
Five ways to grow your MRR
Whichever way you decide to measure it, moving your MRR in the right direction is the key. Here are five tactics to do just that:
1) Reinforce your value
Nothing kills MRR growth like churn. Some churn is unavoidable, especially in a high-growth stage when you’re targeting quantity of subscribers over quality. But reinforcing the value of your product can help you to persuade customers who are thinking of leaving to change their mind. To achieve this, you need a great product and customer service, combined with customer communications that highlight the key benefits of your product.
2) Get your pricing strategy right
Setting the right price for your product is not an exact science. Some prospects will always find it too high, whereas others would be willing to pay more. Continually testing different price points will get you closer to the sweet spot where you're maximizing MRR.
Take a deep dive into SaaS pricing strategies with our ultimate guide.
3) Create scalability
Make it easy for your subscribers to access the next level of service. Introducing tiered packages - where your customers pay incrementally to access more of your service, or usage-based pricing based on the number of users and how much they are consuming - creates a scalable revenue model.
4) Perfect your checkout
Whether a customer is joining, renewing, or upgrading don’t lose them at the last minute. An often overlooked part of the subscription journey is the checkout experience. Pre-populated forms, a choice of payment methods, and localized language and currencies can all play a part in a frictionless process. But it’s a balance - some friction for security protocols can provide the confidence to see the transaction through.
5) Identify your upsells
Whereas effective marketing and a product-led growth strategy can build MRR by adding new subscribers, sometimes the big wins come from targeting existing accounts that have more budget to spend. Identifying these can be as simple as comparing their current spend with you to their relative spending power. A dominant brand generating a low MRR could be ripe for expansion. Look at usage - be it people, time, or compute - to identify subscribers that are becoming more reliant on your product. Depending on the size of the opportunity, it may be better to navigate these targets away from your automated upgrade flow and have offline conversations with them to negotiate a bespoke (and more profitable) package.
Each of these MRR growth tactics should be measured individually to understand which are working well and where to direct attention and budget.