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What is Monthly Recurring Revenue (MRR)? Definition, Calculation & Types

Monthly recurring revenue (MRR) is a key metric to measure the health of a subscription business by tracking the movement of new customers signing up and existing customers churning out. MRR captures these constant fluctuations in your revenue and shows the percentage of your revenue growing or shrinking.

Monthly recurring revenue is a useful metric to track, as regular monthly revenue calculations do not include annual or biannual subscriptions or changes to subscription plans. MRR is a more precise metric because it shows your current conditions and makes it easier to forecast future revenue accurately. At Belkins, we use MRR to enable our sales teamsto manage their budget and make strategic decisions about investing and scaling.

Before using an MRR calculator online, you need to know what metrics are essential to calculate different types of monthly recurring revenue. In this article, we’ll cover the following issues:

  • What does MRR stand for?
  • What is monthly recurring revenue MRR?
  • What is MRR in business?
  • How to calculate MRR?
  • What it means for sales.

MRR definition:What does MRR stand for?

Don’t mistake regular monthly revenue (RMR) for monthly recurring revenueMRR, meaning that to calculate regular monthly revenue, you just add up all the sales revenue generated during the month. However, MRR calculation is somewhat more complex.

An MRR definition includes a business's total revenue from recurring charges, such as discounts, coupons, and monthly add-ons, excluding one-time fees. Especially true to a proven business model of subscriptions, MRR is an effective way to smooth out the highs and lows of your pricing plans and billing periods and come up with a single number that you can use elsewhere.

What is MRR in the business model of subscriptions:How to calculate MRR?

MRR (monthly recurring revenue) helps you understand how your customers engage with your product.

It’s easy to play with MRR calculators online, as there’s a slew of options. However, it’s even easier to calculate your monthly revenue generated on your own.

An MRR formula is pretty straightforward. Just multiply the number of customers (subscribers) by the average revenue per user (ARPU):

MRR = number of customers x monthly ARPU

Suppose you have 100 subscribers on the $45/month plan. The MRR will be:

(100 x $45) = $4500

A rise in MRR means that you're acquiring more customers, existing customers are upgrading their plans, or both. A fall in MRR signifies churn — an increase in downgrades and cancellations.

While MRR is often considered a basic metric, it provides important insight into the growth of a subscription business. While the most obvious way to measure your SaaS company's MRR growth is simply by calculating the difference between this month's total revenue and last month's, there are several nuances that you should be aware of.

What are the different types of MRR?

To understand why MRR changes from month to month, you'll need to track the specific factors that impact it — such as customer acquisition, upgrades, downgrades, and cancellations.

As your subscription business grows, you will want to monitor not only your overall MRR, meaning that more factors affect it over time. When you break down the MRR into parts, each component offers a unique perspective on revenue, customer behavior, and financial health. Let’s take a closer look at what is MRR in business.

New MRR

MRR from new customers is the amount of money a company brings in from its new subscriptions during a given month.

Suppose your SaaS business gains 20 new subscriptions under the $45/month plan, then the New MRR will be 20 x $45 = $900.

Churn MRR

Churn MRR stands for the total amount of your business's lost revenue over a specific month due to canceled subscriptions. Calculate precisely how much your business loses from canceled customers.

If 5 of your customers paying $500 per month cancel their premium plan subscriptions in the same month, then your monthly recurring revenue will take a hit of $2,500.

Expansion MRR

An expansion MRR definition includes upsells, cross-sells, or add-ons. It’s an additionalMRR, meaning you can upgrade your existing customers and expand your company’s recurring revenue. A positive figure is a sign that you have successfully retained your customers. As no Customer Acquisition Cost (CAC) is associated with these sales to existing customers, this is a good indicator of your company's bottom line.

Here’s how the Expansion MRR calculation goes: just add all additional subscriptions that occurred within that month and came from existing customers.

Also, you can average the rate of expansion (upgrading) by using this Expansion Rate MRR formula:

(Expansion MRR in that month / Total MRR at the beginning of the month) x 100

Suppose your subscriptions have an MRR of $100K early in the month, and you have sold add-ons, up-sells, and cross-sells to the amount of $12K. Now you can calculate the Expansion MRR growth rate per month.

($12K / $100K) x 100 = 12%

Net New MRR

A Net New MRR definition is the amount of money you receive from customers in a given month that was not received from them the previous month. To calculate it, use a Net New MRR formula:

Net New MRR = New MRR + Expansion MRR – Churned MRR.

A negative number is the amount of lost revenue. It happens if what you get from New MRR and Expansion MRR is less than Churn MRR. If it’s more than Churn MRR, you have gained revenue. 

For example, Month 3 brought you 10 new customers at $150/m, upgraded five current customers from $45/m to $150/m, and churned out 3 premium plan customers who paid $300 each. As a result, your Net New MRR for Month 2 is $1500 + $525 - $900 = $1,125.

Upgrade MRR

Upgrade MRR is the increase in revenue from subscriptions that move to higher pricing plans and add-on packages over a specific month.

For example, when an existing customer moves from a Starter Plan of $25 to a Premium of $200 and gets add-ons for $50, the Upgrade MRR calculation is as follows $200 – $25 + $50= $225.

Downgrade MRR

Downgrade MRR is the amount of money lost when subscribers move from their existing plans to lower-priced ones.

How to calculate MRR for downgrades?

The amount of their original plan – the amount of the basic plan = Downgrade MRR

Suppose a customer downgrades from a higher plan ($200) to a basic one ($45), then the Downgrade MRR will be $200 – $45 = $155.

Reactivation MRR

By calculating MRR from previous customers, you measure the profit gained by winning back lost customers and the success of a churned customer-retention strategy.

Suppose 10 of your churned customers reactivated their accounts in Month 2 by choosing a basic plan of $45/m. Then the Reactivation MRR for Month 2 is $450.

Contraction MRR

A Contraction MRR definition is the amount of lost revenue from downgrades and cancellations. Some contraction is due to customers downgrading, but other factors also contribute to contraction MRR.When a customer cancels, downgrades to a lower-priced plan, pauses, uses credits, is given a discount, or stops a recurring add-on, you will have lost revenue.

For example, suppose you give 100 of your loyal customers a discount of $20 each in Month 4, your Contraction MRR will equal 100 x $20 = $2000 for Month 4.

We’ve just seen formulas for different MRRs, and they all include only monthly contracts. To include annual contracts in your MRR calculation, divide the yearly contract amount by the number of months in the subscription term. When using the data in business decisions, it is best to use it on a monthly basis. However, suppose annual contracts make the bulk of your recurring revenue model. In that case, it makes more sense for you to calculate annual recurring revenue (ARR) as one of the otherkey metrics for subscription businesses.

Why is tracking MRR important for your business?

Tracking your MRR meanings helps you to get a good picture of the revenue potential of your business. Additionally, it can help you decide how to grow your business and which steps to take. Let’s answer the question: what is MRR in business strategies?

Measure your business performance over time

It’s essential to track your subscription business’ performance regularly. It is good practice to measure the performance of your subscription business once a month, as one-off sales mean you will receive all of your income at one time, and you, therefore, need to be able to sustain your business throughout the year.

In an attempt to have a steady cash flow every month, you need to track your business’ revenue and make adjustments when needed. That’s whereMRR calculations come in handy, helping you determine how you’re progressing toward the year’s revenue quota.

MRR is useful for monitoring month-over-month trends, providing near-term insights on your business's financial performance. You can also look back at the year to help set realistic future goals and use your finances to attain them.

Estimate future revenue

An effective MRR will help you to make accurate sales projections and business plans. This can let you anticipate future revenue and make changes in sales efforts to increase revenue for the next month.

Let’s see how to calculate MRR for future estimation. For example, you want to forecast your February revenue to intelligently plan your budgeting for the month and create realistic goals that are within reach. The following formula can be applied: MRR in January (month one) x historical revenue growth rate = MRR in February (month two).

If in January you have $4,500 in your MRR, meaning that in February you will make the same revenue or more, then you add the historical revenue growth rate of 6-8% and get $4,770 for February.

Calculate budget

The MRR projections, which represent the revenue and expenses of a business over time, are essential for planning and budgeting for growth. The projections consist of both the cash coming into a business and going out over time. Knowing what to expect, you know how to plan your budget and invest your resources. 

For example, you see your MRR has increased this month, but your new MRR is decreasing, which means that while existing customers stay put, new customers aren’t numerous. Thus, you conclude lead generation campaigns should be among the planned expenses.

How to grow MRR

If you want to grow your MRR, you need to set a quota for your sales team. An MRR quota is a goal set for the sales team that aims to improve sales performance. Setting goals will help you better understand what works and what doesn't when it comes to increasing revenue.

It’s impossible to see hockey stick growth in your MRR, but you want to know what you can do to nudge the graphs of committed monthly recurring revenue higher than a month before.

Let's look at four revenue-generating ideas you can implement immediately and see how your monthly revenue increases!

  1. Forget about free plans. In the software industry, freemium plans are the norm. However, we implore you to reconsider this common practice.Businesses that offer free plans for their products are giving away too much. When freemiums are used as a marketing tool, it sometimes works as price matters in consumer businesses. However, when SaaS subscription models lock the conversation at $0, what would customers say to “I'm currently spending $0…why would I spend more?” This establishes a mindset that discourages people from valuing your product. At that, providing support to many free users is expensive. You need to spend money on servers and staff, which can be very costly for a small company. Don't offer a free plan if you believe clients should try your product for free. As in such a case, you not just show a $0 value but also gives customers only a limited view of your product's capabilities. Instead, offer a time-limited free trial.
  2. Remove the unlimited mode. Pricing software as a service (SaaS) products isn’t a cakewalk. But one thing is sure: offering an unlimited plan is a perfect way to lose money.You're likely already charging far less than your services are worth, but an “unlimited” plan will only make things worse.When you set prices, you should consider the value of your work. The greater the value, the more money you should charge. But does ‘unlimited’ imply value? No. Besides, you are limiting your income by placing a cap on the profits you can make from any customer. The clients who will pay for your product's most expensive plan are those who get the greatest value from it — and who use it most. They should be charged accordingly.
  3. Bump up your prices. Many companies charge too low prices, failing to charge enough for their services. This is often because the founders don't give themselves enough credit and fear rejection. SaaS/subscription businesses provide products and services for clients that save them time and money and produce value. We bet your clients make more than $30-50 per hour, whereas you saving them at least an hour per month cannot sell your monthly subscription at a lower price, right? If you want to increase your conversion and growth rates, simply double the prices of your product or service and see what happens.
  4. Cross-sell & upsell. When it comes to growing your business, building a relationship with your current customers is far more cost-effective than acquiring new ones. If customers grow and get more value from your business over time, you should reevaluate pricing. Start offering upgrades to clients who find your product more useful than you initially intended. For example, you can add per-user pricing so that your revenue grows if the client’s team grows. You can use tiered pricing as a way to boost revenue per customer by increasing the price of your product or service at different levels. Usage-based pricing is another way to get what clients pay in line with what they use. The more they use a service, the more they should pay. These fees are often directly tied to the value of the service provided. You likely have some base plans that you already offer, but it's helpful when deciding exactly how you will “bucket” features within those plans to map everything out in advance. If you package your product's features as optional add-ons, it is easily customizable for each customer.

What you learned when calculating MRR

Now you know how to calculate MRR and what is MRR in business. It’s valuable knowledge as an online MRR calculator will never give you as comprehensive a picture of your company’s financial health as your deep understanding of economic processes does.

Although calculating MRR doesn’t belong to the Generally Accepted Accounting Principles (more interested in Deterred Revenue and Billings), no successful business is possible without being aware of how much revenue your company can financially generate every month.

MRR is the most important metric for a SaaS company because it demonstrates the money a SaaS company expects to receive from customers each month. Other important metrics include growth rate, retention, total contract value, customer lifetime value, and average selling price, but at the end of the day, MRR is king.

Subscription businesses generally have more predictable revenue streams than other industries. An MRR analysis is a great way to get a snapshot of your company's sales over time. It gives you an idea of whether revenue is growing or shrinking and helps sales leaders make informed decisions about their next steps.