Contracted Monthly Recurring Revenue

What is Contracted Monthly Recurring Revenue?

Contracted monthly recurring revenue (CMRR) represents the monthly revenue a SaaS company can expect to receive from subscription payments. It adds upcoming bookings, downgrades, and churn to monthly recurring revenue (MRR) to measure future cash inflows and outflows.

When you measure MRR alone, you focus solely on your company’s past and current performance. With CMRR, you incorporate the churn and bookings you know for a fact will happen within the next month.

For instance, a customer who cancelled their subscription on day 2 of a month-long cycle would show up as a source of revenue in the current period since they paid for the month 2 days ago. And a new $10,000/month contract set to start in a few days wouldn’t show up at all.

The number you get when factoring these in represents how much you can actually bank on in the following months. This makes CMRR a more “true” reflection of your SaaS business as it stands today.

Synonyms

• CMRR
• Contracted MRR
• Committed monthly recurring revenue

Importance of Measuring Contracted Monthly Recurring Revenue in SaaS

Since SaaS products use a subscription model that involves contracts and predictable revenue, measuring CMRR helps in understanding a company’s performance and growth potential. It gives them a predictive view of their income, which is more telling of future success than looking at current customers alone.

For business leaders and investors, CMRR is a key indicator of the company’s stability and growth prospects. 

It aids in:

• Understanding future revenue
• Forecasting
• Resource allocation
• Scenario planning (around important SaaS metrics like CLV and ACV)
• Understanding the business’s valuation (especially for companies looking for investment or planning for expansion)

Beyond financial forecasting, CMRR acts as a performance metric for assessing the health of the customer base and the effectiveness of sales, marketing, and customer success strategies. It helps you identify trends in customer acquisition, retention, and expansion within your subscription business.

It’s also important to measure CMRR alongside contracted annual recurring revenue (CARR). Looking at them together helps you dive deeper into when changes are happening and what cash inflows/outflows look like over an extended period. If CMRR and CARR differ significantly from MRR and ARR (respectively), you need to look at the reasons for the discrepancy.

How to Calculate CMRR

CMRR incorporates:

• MRR
• New sales
• Upgrades (or upsells)
• Downgrades
• Churn

When a customer signs a contract, the monthly revenue from that contract adds to the CMRR. If existing customers upgrade or expand their subscriptions, that increment also boosts the final figure. Conversely, downgrades and cancellations reduce its value.

The formula for CMRR is as follows:

CMRR = Current MRR + New Bookings + Upsell Bookings – Downgrade Bookings – Churn

Let’s say a company has the following figures for a particular month:

• Current MRR: $50,000
• New Bookings (revenue from new customers): $5,000
• Upsell Bookings (additional revenue from existing customers upgrading): $3,000
• Downgrade Bookings (revenue lost from existing customers downgrading their plans): $1,000
• Churn (revenue lost from customers canceling their subscriptions): $2,000

Now, plug these values into the formula:

CMRR = $50,000 (Current MRR) + $5,000 (New Bookings) + $3,000 (Upsell Bookings) – $1,000 (Downgrade Bookings) – $2,000 (Churn)

CMRR = $50,000 + $5,000 + $3,000 – $1,000 – $2,000

CMRR = $55,000

So, the company’s contracted monthly recurring revenue for that month would be $55,000.

Calculating CMRR for Term-Based vs. Month-to-Month Businesses

When you calculate CMRR, there’s an important consideration for whether you’re operating on a long-term or month-to-month subscription model.

For term-based subscription businesses (e.g., B2B SaaS), CMRR represents the contracted month revenue for that term’s length. It excludes non-recurring revenues (e.g., implementation fees, setup costs) even if they’re scheduled for revenue recognition. Variable fees are only included if there’s a base amount you’re guaranteed every month.

For month-to-month subscription businesses (e.g., a telecom provider), you’ll only factor the minimum contracted component of the service fee into CMRR. For example, if subscribers pay $19.95 per month for a phone plan and an extra $5 per GB of data, the $19.95 is all that’s included.

The Value of Forecasting CMRR

Forecasting CMRR is a valuable exercise for SaaS businesses because it provides a sense of…

• Monthly recurring revenue (MRR) growth potential
• How the customer base will change in the next month
• How churn will impact business performance

With that knowledge, you can better plan your resources, set financial goals, communicate with investors, and make operational adjustments.

Investors are particularly interested in CMRR (just as they are CARR) because recurring revenue figures alone aren’t enough to accurately depict future growth. You could have lost half your customers that month, but since their subscription carries through the end of the period, your MRR wouldn’t reflect that drop in revenue.

By looking at committed and churned revenue, they get a better picture of how an investment prospect will perform in the coming months.

How to Improve Committed Monthly Recurring Revenue

Since CMRR is tied to MRR, your efforts to improve the latter will positively impact CMRR by extension. The same goes for your efforts to reduce revenue loss from churn and downgrades.

Reduce Churn

Without acquiring any new customers, you can improve CMRR simply by cutting your churn rate. There are a few ways to do this:

• Prioritize customer success through onboarding, ongoing engagement, and support for customer issues and concerns.
• Offer tiered pricing and usage-based billing to extend the value of your product to different customer segments, avoid pricing out buyers with lower budgets and fewer needs, and accommodate your most profitable customers with premium offerings.
• Monitor customer sentiment to identify at-risk customers and take corrective action before churn happens.

Keep in mind that reducing churn won’t necessarily result in CMRR growth. For instance, you could cut churn in half, but start losing a higher proportion of your most valuable accounts.

That’s why, while you might be inclined to focus on customers, you’ll actually get a better idea of your financial performance if you look at revenue churn. Your customer churn rate tells you how many customers you lost, but revenue churn tells you how much of your expected monthly/annual revenue is gone because of that loss.

Increase ARPU and Average Deal Size

By increasing your average deal size, you’re growing CMRR without the need for a mass influx of new customers. Besides that, there are other ways to average revenue per user (ARPU) for customers you’re already working with.

• Upselling and cross-selling add to your booked MRR while delivering those customers more value. They can potentially reduce downgrade and churned MRR if customers were thinking of leaving your solution because its features didn’t meet their needs.
• Introducing add-ons like premium features, microservices, and in-app purchases let users customize their product experience and reduces downgrade MRR.
• Expanding your product line (e.g., DealHub CPQ also offering Billing and DealRoom) helps you make massive increases to ARPU and average deal size when customers need an integrated solution across multiple functions.

To increase your average deal size, your sales team has to be proactive in identifying and executing upsells and cross-sells for deals in their pipeline. Figure out which customers your CS team has the most success with selling certain products to. Then, train your sales team on how to uncover those characteristics early on.

Optimize Customer Acquisition

Other than increasing the value of current and future customers and reducing the number of them that get away, you can improve your customer acquisition process by:

• Targeting the right audience with your marketing and sales efforts
• Scoring leads so your sales team spends time on those with the highest value or who are most likely to convert
• Implementing a full-funnel marketing strategy that creates touchpoints for every stage of the customer journey
• Leveraging customer referrals and word-of-mouth marketing to generate low-cost leads
• Using a freemium model to convert a few paying customers while raising overall brand awareness for the masses

You can also make your sales process more efficienct while improving conversions by using sales enablement technology. That way, your reps can access the right marketing collateral (and other info) and get it to buyers at the right time.

Leverage Technology

Maybe it goes without saying, but technology is central to CMRR growth. You need accurate, cross-platform customer, revenue, and pricing data on a continuous basis. If you don’t have a seamlessly integrated tech stack, you don’t have that.

• For customer success teams, use customer marketing and advocacy software to better engage customers and monitor sentiment. Also automate elements of onboarding, reminders, and ongoing marketing communication.
• For sales teams, use configure, price, quote (CPQ) to optimize the sales process. Use sales enablement AI tools to know how to communicate with buyers and when.
• For marketing teams, use a customer data platform (CDP) and integrated marketing automation solution.
• For billing teams, use SaaS subscription management software to automate complex recurring billing, enable customer self-service, minimize involuntary churn, and prevent revenue leaks.
• For pricing managers, use revenue management software that provides you with analytics and price optimization capabilities.

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