Some of the most commonly asked questions online in the world of business today read, “What is monthly recurring revenue?” “What is MRR in sales?” “How to calculate MRR?” and “What is the monthly recurring formula?” These are the issues we are going to address in this article. Monthly recurring revenue, abbreviated MRR, is a financial metric that establishes the income that a firm is expecting to receive every month from clients. In other words, it is predictable revenue. Monthly recurring revenue is a popular metric for subscription-based or Software-as-a-Service business models. Even though the MRR metric is not recognized by popular accounting standards, such as IFRS or GAAP, investors are still interested in monitoring it. It is one of the methods to help investors quickly evaluate the growth of companies. The most listed companies that thrive on SaaS business models report the metric in their quarterly and annual results.
Due to the metric’s popularity among investors, business leaders have become increasingly interested in what monthly revenue is, what MRR means for business, and how it features in marketing.
Types of monthly recurring revenue
Having knowledge of the various types of MRR in your business helps you understand the trends in the metric, for instance, why it went up or down in a given month. It enables you to make better decisions for your business. If the management does not break their MRR by type, they miss out on critical data that would have otherwise helped make their operations more efficient. These various types of MRR are described briefly below.
- It was found by calculating the revenue sourced from acquired new customers.
- It is driven by up-selling and cross-selling. It is the increased revenue that is earned from the business's existing customer base.
- Reactivation MRR is the total amount earned from reactivated clients who had previously canceled services.
- It refers to the total monthly revenue lost due to existing customers who would have downgraded their subscriptions.
- Churn MRR is revenue that the business would have lost due to customers who cancel their subscriptions.
What is MRR in sales?
All businesses thrive on making sales. Otherwise, it is not a business. But what is MRR in sales? MRR is one of the key indicators that the management uses to assess the performance of their sales team. It is particularly true for SaaS businesses. If MRR is increasing, it means the sales team is working hard to acquire new customers.
Why is tracking MRR important?
Most companies that follow the subscription-based business model track their MRR. There are vital reasons for this, and they are described below.
Financial forecasting and planning
MRR forms a basis for SaaS-based businesses to make accurate financial projections because a large part of their revenue source is comparably consistent and predictable. Subsequent months of dependable revenue flow enable the management to model estimates that they can use to plan their businesses accordingly. Since MRR is predictable, companies can use it reliably to make long-term financial plans for their businesses.
Investors are interested in growth, and for SaaS-based companies, MRR is one of the best ways to measure it. It is a key performance indicator. The month-over-month increase or decrease in MRR gives a general overview of whether the business is gaining traction in terms of new customers and revenue or not. Tracking MRR affords businesses the chance for the company management to take remedial actions that are in the best interest of their businesses before it is too late.
How to calculate MRR
One of the most frequently asked questions is always on how to calculate MRR. Calculating the MRR is fairly easy. You need to multiply the average revenue per account by the total number of clients for that particular month. The monthly recurring revenue formula is stated below.
Monthly recurring revenue formula
MRR = number of customers x average billed amount.
For instance, if you have 50 customers who are paying you an average of $10 per month, then your MRR would be $500.
What are the common mistakes when calculating monthly recurring revenue?
No doubt, monthly recurring revenue is a critical financial metric for subscription-based businesses. It is used to predict the much-needed revenue growth. Therefore, companies need to be aware of some of the common mistakes that will yield an erroneous MRR. These are discussed below.
Including once-off payments
One-time payments are not recurring, so they do fit into the monthly recurring revenue formula. Since businesses do not expect to receive once-off payments regularly, including them in calculating the metric will inflate predictable revenue and skew your financial model.
Including trailers in calculating the MRR features is among the most common mistakes that companies make. It is erroneous to include trailers and their expected subscription value before they are converted into customers. It will result in a consistently high list of net new and churned customers as we know that not all trailers finally sign up for the service.
The other misleading error is excluding discounts in the monthly recurring revenue formula calculation. For instance, if you give a subscriber a discount on a $10 per-month plan that they are now paying $7 for per month, your MRR from that subscriber is not $10 but $7.
How to grow your MRR
Businesses such as SaaS are very much dependent on the MRR. Therefore, there is no doubt that there is a need for this metric to experience growth. But how do you do this? There are several ways through which you can grow your MRR, and these are described below.
Increase your pricing
Yes, you heard right. Companies are in business to make a profit. Therefore, if your current monthly revenue flows are not sufficient relative to what the business needs, you should adjust your pricing upwards. One thing for sure is that customers are always willing to add a few dollars more for an excellent product. Therefore, one of the ways you can grow your MRR is by making your product better so that customers are willing to pay more for it.
Remove the free plan
While freemium seems to be a default setting for almost all SaaS companies, the approach can cost you a significant amount of monthly revenue. The freemium approach works perfectly well during the early stages of the business. It is one of the easiest ways to make known to the market that there is a new kid on the block. However, once your business gains traction, there is a need to consider offering a time-limited or eliminating the free plan. It will help you increase the number of paying customers, therefore, increasing your monthly recurring revenue.
Eliminate the unlimited/uncapped plan
To grow your monthly recurring revenue, you can also remove the unlimited plan. This is because it allows your customers to enjoy unlimited value while you would have capped the amount of income that you can receive from them. It is paramount to realize that the kind of customers who make use of the unlimited plan are usually the ones willing to pay you significantly more than you are charging. Since they are the ones experiencing the best out of the service you are offering, it is vital to adjust your pricing accordingly.
Introduce add-on pricing
Introducing features that will enable add-on pricing to your packages will also help in ensuring the growth of your MRR. Of course, there are basic plans that you already have. But by introducing add-on features for an extra charge, you will find that there is a significant number of customers who will sign up for them. It will increase your revenues in the process.
Capitalize on MRR in marketing
You can also experience growth in your MRR in marketing. It involves engaging in drives that enable your customer base to grow, therefore, increasing your revenue flows. Some companies will help guarantee successful lead marketing, and you can consult these if you are to increase your MRR.
How to set monthly recurring revenue goals
One of the best ways to set your monthly revenue growth goals is through a waterfall chart. It shows the relationship that exists between the cumulative MRR and days of the month. The waterfall chart should be checked daily to ensure that the business is on track to attaining its MRR target. It allows you to push your sales team into gear towards the goal, especially as the end of the month approaches.
MRR is a very critical financial metric and one that investors are very much interested in. Its ability to provide predictable revenue makes it a useful tool in decision-making and growth management. It is also critical to ensure that the business converts as many leads as possible to grow its MRR.
There are service providers who can help manage your appointment setting. Engaging these will help increase your revenue growth.