It's no secret that recurring revenue is the driving force of any SaaS business. With Monthly Recurring Revenue, You don't have to worry about one-off sales since they're coming back again and again!
What is Monthly Recurring Revenue?
Monthly Recurring Revenue (MRR) is a metric that shows the total income generated from an organization's recurring revenue sources during a given month.
MRR is calculated by taking all the subscriptions and dividing it by the number of months in the billing cycle.
If you're thinking about starting a SaaS company, this metric will be critical for determining your success! Also, If you want to know what monthly recurring revenue is for your company, then take a look at this blog post where we discuss everything about MRR!
How to Calculate MRR?
It's simple to calculate monthly recurring revenue or MRR.
All you have to do is take your average revenue per user (ARPU) on a monthly basis and then multiply that by the total number of users in a given month.
Monthly ARPU x Total # of Monthly Users = Monthly Recurring Revenue
For finding the Total MRR, the sum of all the MRRs is done!
Example - If you have 10 customers in your Basic plan at $10 per month, and 10 customers in your Pro plan at $15 per month,
Your total MRR would be (10 x $10) + (10 x $15) = $250
Common Mistakes While Calculating MRR:
1) Including quarterly, semi-annual or annual billing cycles billed at full value for the month:
- Even if someone is paying you all the money upfront, their subscription value in MRR calculations should be divided by the intended subscription length.
- This is because they are only paying for one month of service even though it's set to last an entire year.
2) Allowing for rounding errors to affect calculations:
- When calculating monthly recurring revenue, it is important that all numbers are treated as whole numbers
3) Not Including Discounts:
- Another error is not to include discounts in your MRR calculations. If you provided a discount on a $100/month plan so they’re paying $50/month, your MRR isn’t $100/month; it’s $50/month.
4) Subtracting transaction fees and delinquent charges
- Another common mistake to avoid is deducting transaction fees and delinquent charges from your MRR.
- For example, if you charge a $30/month fee for plan members who don’t make their payments on time, add that fee into the equation when calculating monthly recurring revenue.
How to Increase MRR?
Monthly recurring revenue is usually increased by the following strategies:
- Upselling or cross-selling additional products to existing customers.
- Increasing prices for current services and packages.
- Lowering free trial periods.
- Adding new features, apps, or other value propositions.
- Offering discounts every month.
There are many ways to increase monthly recurring revenue - the key is identifying the most successful strategy for your specific company and adjusting accordingly every month.
Why is MRR Important?
There are 3 primary reasons:
1) Tracking and Measuring growth and momentum
MRR is a critical metric for measuring growth and momentum of your company.
Monthly recurring revenue can give you some indication on how much money will be coming in each month, which gives you an idea about the size of your business’s potential customer base.
2) Financial Forecasting and Planning
MRR can also be used to forecast and plan your company’s financial future.
Knowing what you're going to make each month means that you'll know how much of an operating budget is needed for the next 12 months, which will allow you to determine if there's enough in the bank account or not.
3) Comparing with competitors
Comparing monthly recurring revenue to other companies in the same sector helps you assess where you stand in the market.
MRR vs ARR
It's important to understand the distinction between MRR and ARR.
It might be tempting for a company with short-term contracts to calculate their revenue as monthly recurring revenue (MRR), but it would not give accurate information on subscriptions at any given time because these types of subscription are typically cancelled within 30 days after purchase.
Hope this post was helpful!