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To ensure financial success for any business, the ability to reliably predict and forecast cash flow is paramount.
Monthly recurring revenue helps companies achieve this by providing them with an expected revenue stream from their customers that can be tracked and planned for on a month-to-month basis.
What is Monthly Recurring Revenue (MRR)?
Monthly recurring revenue (MRR for short) is a metric used to measure the amount of recurring revenue that a company can expect to receive from their customers every month.
It is a measure of the predictable revenue that a business can rely on over the course of a month and is typically calculated using subscription services or recurring payments from customers.
MRR is one of the most important performance metrics to track as it can give them more accurate revenue predictions than other metrics, such as lifetime value (LTV).
This metric accounts for recurring monthly fees, discounts, and credits, including:
- Subscription Fees: Monthly streaming services, software subscriptions, and any other subscription-based businesses.
- Recurring Services: Ongoing services such as maintenance contracts, support plans, and consulting fees using the retainer model.
- Usage Fees: Usage-based payments charged to customers monthly.
- Discounts: Any sales discounts or credits applied to customer bills.
- Coupons: Promotional and loyalty rewards that occur on a predictable basis.
- Recurring Add-Ons: Any additional services or products that are automatically added to customers’ monthly bills.
MRR calculation does not factor in one-time payments, receivables, or any other non-recurring revenue.
It is also important to note that MRR can be a volatile metric, as it is dependent on customer retention and churn rate. If customers cancel their subscriptions or stop using recurring services, the MRR will decrease.
Conversely, if new customers are acquired or existing customers upgrade their subscription plans, the MRR will increase.
- MRR – The abbreviated term for Monthly Recurring Revenue.
- Predictable Revenue – The term that refers to revenue that is expected on a monthly basis and is calculated in the MRR formula.
- Revenue Retention – The metric by which companies measure how much of their monthly recurring revenue (MRR) has been retained over time.
Benefits of Knowing Monthly Recurring Revenue (MRR)
Having a clear understanding of revenue on a month-to-month basis is vital for any business. Critical benefits of knowing MRR include:
- Accurate Forecasting: Businesses can plan and budget accordingly by understanding how much money is consistently coming in.
- Improved Cash Flow Management: Knowing MRR allows companies to more accurately predict their cash flow each month, allowing them to make better decisions about where to allocate resources for maximum efficiency and growth.
- Insight Into Customer Retention and Churn: Tracking MRR can provide valuable insights into customer retention rates, which in turn can help businesses identify ways to reduce customer churn.
- Better Relationships With Investors and Stakeholders: Stable MRR shows potential investors and stakeholders that a business is on the right track and can be relied upon to generate consistent revenue. Accurate reporting means faster and more efficient board meetings.
- Increased Visibility Into Upsells and Cross-Sells: Tracking MRR helps businesses understand when customers are ready for upsells or cross-sells and allows them to take advantage of those opportunities.
- Optimized Pricing Strategies: MRR helps businesses determine appropriate pricing for their services and products, allowing them to make sure that they are getting the most out of their relationships with current customers.
Understanding which accounts are the most valuable can also help companies improve their customer relationship management efforts.
When businesses understand their customers’ monthly spending patterns, they can nurture those accounts to increase the value of their relationships.
Types of Monthly Recurring Revenue (MRR)
MRR isn’t as simple as it seems. Because each subscription business might use a different revenue model, figuring out the revenue per customer isn’t always straightforward.
There are different types of MRR, including:
The MRR resulting from customers upgrading their subscription plans or services is called upgrade MRR.
This metric helps businesses understand if their customers are engaging with new services and products or upgrading to higher tiers of subscriptions, allowing them to improve their product portfolio and upsell opportunities.
Typically, upgrade MRR is a positive number, indicating that customers are investing more money into their subscriptions.
Churn MRR is the amount of monthly recurring revenue lost due to customer cancellations or downgrades.
Tracking churn MRR provides valuable insights into how customers are engaging with services and products, as well as which strategies and tactics are effective in reducing customer attrition.
When customers downgrade their subscriptions or services, the MRR resulting from those changes is referred to as downgrade MRR.
Following this number helps businesses identify when customers are not getting enough value from a service or product and can help them improve customer satisfaction and retention rates.
Customers who have canceled their subscriptions but then reactivated them at a later date generate reactivation MRR.
Companies need to include this metric in their MRR calculations to get an accurate picture of their customer base and the value that they are generating.
If customers increase their spending on a service or product, companies can track expansion MRR. Companies should look for opportunities to expand their customer base and boost retention by capitalizing on expansion MRR.
Contraction MRR is the opposite of expansion MRR—it is the MRR resulting from customers decreasing their subscription plans or services.
This metric helps businesses identify ways to reduce customer churn and improve retention rates.
Net New MRR
The total amount of new MRR generated in a given period is called net new MRR.
This metric helps businesses understand the growth rate of their customer base and track the performance of customer acquisition campaigns.
How to Calculate MRR
The monthly recurring revenue formula is as follows:
Number of Monthly Subscribers × Average Revenue Per User = MRR
For example, if a business has 100 customers paying $50 per month, their total MRR would be $5,000 ($50 x 100 customers).
Why Tracking MRR is Important
MRR isn’t just a vanity metric—it gives companies valuable insights into revenue operations.
Closely monitoring MRR helps companies understand how enterprise value changes over time and provides a snapshot of their overall health and business performance.
For instance, tracking churn and expansion MRR can help companies identify high-value customers and opportunities for growth.
Tracking contraction MRR can alert businesses to potential customer attrition issues and allow them to take steps to mitigate the fallout from those changes.
When calculating net new MRR, companies can get an in-depth understanding of their customer acquisition efforts and identify areas for improvement in their sales process and customer onboarding.
MRR is a key metric in revenue forecasting because it provides insight into how much revenue a business can expect to generate each month.
Companies can use this data to plan their budget, allocate resources, and adjust pricing models accordingly.
MRR is also helpful in predicting customer lifetime value and understanding the overall health of a company’s customer base.
Companies that use the subscription business model face unique challenges when it comes to budgeting.
Since most of their income is monthly revenue, it is predictable, but it also means that businesses have to plan and prepare for any deficits or spikes in revenue.
Tracking MRR provides valuable insights into expected income, allowing companies to budget accordingly.
How to Increase Monthly Recurring Revenue (MRR)
From increasing the revenue per customer and securing longer contracts to using technology and automation, companies using the subscription model can increase their MRR in several ways.
1. Selling annual subscriptions at a discount
Unlike monthly plans, annual contracts offer companies the option to charge customers upfront and provide a discount for the commitment.
This often incentivizes customers to purchase the product or service and provides a steady stream of income that companies can rely on.
Since this strategy involves reducing the potential total revenue by discounting an annual subscription, it usually pays off in the long run because it ensures that the customer will be “paying” for an entire year.
By focusing on annual recurring revenue (ARR), companies can reduce the risk of customer churn that a monthly subscription carries, increasing MRR in the long run.
2. Investing in customer acquisition
Acquiring new customers is key to creating future revenue. Companies must invest in marketing and other customer acquisition strategies such as content creation, referral programs, and targeted ads.
These activities help firms reach a broad audience of potential customers and generate leads that can be converted into paying customers.
Additionally, investing in customer service initiatives like onboarding and customer success can reduce churn and help businesses build long-term relationships with current customers.
2. Increasing revenue per customer
Offering upgrades or additional services to existing customers can help companies boost their average revenue per user (ARPU).
By creating new revenue streams for active subscriptions, companies can encourage customers to increase their subscription plans and add more value to their purchases.
This strategy is known as inside sales, and many sales organizations have teams dedicated to finding new sales opportunities within existing client relationships.
3. Automating the billing process
Billing is one of the most tedious and time-consuming tasks in any business, but it’s an essential component of success.
Automating billing processes with subscription management software can help companies increase efficiency, reduce manual errors, and streamline the customer experience.
These tools also enable businesses to track MRR more accurately by providing real-time insights into revenue performance.
Additionally, subscription management solutions offer features such as automated payment retries and dunning management, which can help companies minimize missed payments and reduce customer churn.
4. Leveraging Configure, Price, Quote (CPQ) solutions
Configure, price, quote (CPQ) software is purpose-built to streamline the pricing process and provide customers with accurate quotes that reflect their unique requirements.
CPQ solutions enable companies to quickly create and manage complex pricing models, optimizing their offerings and making them more attractive to customers.
They also speed up the sales cycle by allowing sales teams to quickly generate custom quotes, ensuring customers get the best deal possible.
By leveraging CPQ solutions and subscription management software, companies can increase their MRR by making their pricing structure easier to understand and more attractive for customers.
People Also Ask
How do you generate recurring revenue?
Companies generate recurring revenue in a few ways:
1. Offering subscription services
2. Charging customers regularly for usage fees
3. Creating membership models
4. Including additional services to existing products (e.g., the “freemium model” or low-cost add-ons)
5. Selling digital content
What is monthly recurring revenue in SaaS?
In Software-as-a-Service (SaaS) businesses, Monthly Recurring Revenue (MRR) is the revenue generated in a given month from customers who have signed up for a subscription to use the software. This number can vary widely depending on the size and type of business, but it typically includes both new subscriptions and upgrades or renewals from existing customers.
What are examples of recurring revenue?
Examples of recurring revenue include:
1. Subscription services
2. Usage fees
3. Membership models
4. Freemium models
5. Low-cost add-ons for existing products
6. Digital content, such as music and videos.