Monthly Recurring Revenue (MRR) is a key performance indicator (KPI) used primarily by subscription-based businesses to measure the total amount of predictable revenue they can expect to receive each month.
This metric provides insight into a company’s financial stability and growth potential. MRR is a cornerstone metric for Software as a Service (SaaS) companies and other subscription-based businesses because it provides a clear snapshot of revenue trends over time.
Key Takeaways
- Definition: Monthly Recurring Revenue (MRR) is a measure of the predictable and recurring revenue stream generated by subscribers in a given month, commonly used in the SaaS industry.
- Calculation: MRR is determined by multiplying the total number of paying customers with the average monthly subscription fee.
- Strategic Importance: MRR provides insight into the health and growth of a SaaS business, enabling better forecasting, budgeting, and investment decisions.
- Optimization Strategies: To increase MRR, companies can focus on acquiring new customers, upselling/cross-selling to current subscribers, refining product offerings, or adjusting pricing models.
- Limitations: While critical for tracking SaaS revenue, MRR may not account for non-recurring revenue, can be affected by short-term changes, doesn’t necessarily capture customer longevity or differences in subscription tiers, and requires complementary metrics for a holistic understanding.
- Complementary Metrics: In addition to MRR, companies should consider metrics such as customer acquisition cost (CAC), customer lifetime value (CLV), churn rate, and expansion revenue to gain a comprehensive view of the health of their SaaS business.
Why does Monthly Recurring Revenue matter for your business?
The significance of MRR extends beyond just numbers for subscription-based businesses:
- Predictable Revenue Stream: MRR offers a clear picture of consistent and predictable revenue, enabling businesses to plan future investments, expansions, or initiatives.
- Business Health: Monitoring changes in MRR helps in identifying the overall health and momentum of the business.
- Investor Attraction: Consistent growth in MRR can attract potential investors as it depicts business stability and scalability.
- Customer Insights: Fluctuations in MRR can provide clues about customer churn rates, the effectiveness of marketing campaigns, or the success of new feature launches.
- Resource Allocation: Understanding MRR assists businesses in making decisions about resource allocation, ensuring that expenses don’t exceed incoming revenue.
How to calculate Monthly Recurring Revenue (MRR)?
Explanation of the parts of the formula:
- Total Number of Paying Customers: This number signifies how many customers are actively paying for the subscription or service in a given month. It’s crucial to consider only the customers who have made successful payments.
- Average Monthly Subscription Fee: This is the average amount paid by the customers for the subscription or service on a monthly basis. This average can vary based on different subscription tiers, discounts, or promotions in place.
- When you multiply these two values, you get the total recurring revenue that you can expect from your subscribers each month.
Monthly Recurring Revenue (MRR) is a cornerstone metric for any subscription-based business, indicating the predictable revenue that the company can expect every month. A higher MRR indicates steady growth, while a fluctuating MRR might hint at churn or inconsistent sales efforts.
Example Scenario
Let’s say for a Software as a Service (SaaS) company:
- The company has a total of 500 active subscribers or paying customers in a given month.
- The average monthly subscription fee (taking into account various pricing tiers and any discounts) comes out to be $50.
Using the provided formula, we can calculate the MRR:
- MRR = 500 x $50
- MRR = $25,000
This means that the SaaS company can expect a recurring revenue of $25,000 from its subscribers for that particular month.
Tips and recommendations for increasing Monthly Recurring Revenue
Offer annual subscriptions at a discount
One of the most effective ways to increase your monthly recurring revenue (MRR) is to offer annual subscriptions at a discounted rate. This strategy encourages customers to make a longer-term commitment, providing your business with a steady stream of revenue. Instead of paying monthly, customers can pay upfront for an entire year at a lower cost. This not only guarantees revenue for you, but also provides savings for your customer, creating a win-win situation. It also reduces the likelihood of churn by locking customers in for a longer period of time.
Upsell and cross-sell additional features
Another strategy is tiered pricing, where higher-tier plans offer additional features or benefits. This method encourages customers to upgrade their plan to access more services. By continually improving and adding new features to your higher-priced plans, you create an incentive for customers to upgrade. However, this should be done carefully to ensure that the value offered at each level is commensurate with its price. In addition, consider cross-selling related products or services that complement your primary offering. This can increase the overall value of each subscription and increase MRR.
Reduce churn
Retaining existing customers is just as important, if not more important, than acquiring new ones. High churn rates can significantly impact MRR, so it’s critical to focus on customer satisfaction and retention strategies. Providing excellent customer service, addressing user concerns promptly, and continually adding value to your product or service can go a long way toward reducing churn. Collect regular feedback from your customers to identify common problems or areas for improvement.
Run special promotions
Run special promotions
Running special promotions or discounts can be a great way to attract new subscribers or win back former customers. These can be seasonal offers, discounts for first-time users, or exclusive offers for returning customers. While this strategy may reduce your immediate revenue, it can increase your MRR in the long run by attracting more subscribers.
Introduce add-ons or additional services
Finally, consider introducing add-ons or ancillary services that complement your core offering. These could be additional tools, features, or services that customers can purchase in addition to their subscription. This not only increases the overall value of each subscription, but also provides additional revenue streams for your business. Be sure to price these add-ons appropriately and ensure that they truly add value to your customers’ experience.
Examples of use
Usage-based Pricing Model
- Scenario: A SaaS company offering cloud storage realizes that while some users barely use their storage quota, others often need more.
- Use Case Application: Instead of a flat rate, the company can introduce usage-based pricing. Users pay for the storage they consume, encouraging heavier users to buy more, thus increasing MRR.
Customer Feedback to Improve Features
- Scenario: A subscription-based online learning platform notices a decline in MRR.
- Use Case Application: By collecting feedback, they realize that customers want more interactive content. The platform then introduces interactive quizzes and simulations, enhancing the value proposition and subsequently improving MRR.
Introducing a Premium Tier
- A music streaming service with a basic and standard tier recognizes that some of its user base desires exclusive content and enhanced features.
- The service introduces a premium tier at a higher price point. This tier offers exclusive releases, higher quality streaming, and ad-free listening. By catering to this demand, the company can attract subscribers to this more expensive tier, thereby increasing the MRR.
Referral Bonus System
- A subscription-based e-magazine finds that its most loyal readers often recommend the magazine to their friends and colleagues.
- To leverage this word-of-mouth marketing, the magazine introduces a referral bonus system. Existing subscribers who refer new paying subscribers get a discount or an extension on their own subscription. This not only retains current subscribers but also adds new ones, boosting the MRR.
Flexible Contract Lengths
- An online project management tool with a yearly subscription notices potential customers hesitating to commit due to the long duration.
- The company decides to offer more flexible contract lengths – monthly, quarterly, and yearly. By providing options, they cater to a wider range of customers, from those looking for short-term solutions to those ready to commit long-term. This flexibility attracts more subscribers and stabilizes MRR as more customers find suitable plans for their needs.
Monthly Recurring Revenue SMART goal example
Specific – Increase the Monthly Recurring Revenue (MRR) by 20% (from 50,000 EUR to 60,000 EUR per month).
Measurable – MRR will be tracked and compared monthly, before and after implementing the new revenue-driving initiatives.
Achievable – Yes, by introducing new subscription tiers, leveraging referral bonuses, optimizing the pricing model, enhancing product features based on customer feedback, and conducting targeted marketing campaigns.
Relevant – Yes. This goal aligns with the company’s objective to enhance its revenue streams and secure a stable financial footing in the competitive market.
Timed – Within the next twelve months.
Limitations of using Monthly Recurring Revenue
While the Monthly Recurring Revenue (MRR) is a vital metric for assessing consistent revenue streams in a SaaS business model, it presents some limitations when used for in-depth business analysis:
- Doesn’t Reflect Non-Recurring Revenue: MRR only captures the consistent and predictable revenue from subscribers. It does not account for one-time fees, upsells, or other sporadic revenue sources, potentially missing out on a fuller picture of the company’s earnings.
- Can Obscure Short-Term Fluctuations: Since MRR focuses on monthly averages, it can mask short-term drops or spikes in customer acquisition or churn, which could be essential for timely decision-making.
- Doesn’t Differentiate Between Different Subscription Tiers: If a SaaS company has various subscription levels at different price points, MRR alone doesn’t break down the distribution of customers across these tiers. A growth in MRR could come from more lower-tier subscribers or a few high-tier ones.
- No Insight into Customer Longevity: While MRR indicates how much you’re earning from subscribers monthly, it doesn’t tell you how long these subscribers will stay. Customer lifetime value (CLV) is a separate metric needed to assess this.
- Subject to Seasonal Variations: Like AOV, MRR can also vary due to seasonal factors. For instance, business software might see higher MRR during fiscal year beginnings but dips during holiday seasons.
- Not Directly Tied to Profitability: An increase in MRR doesn’t automatically equate to more profits. If the costs of acquiring and serving new customers are high, a growing MRR might not lead to better bottom-line results.
- Overemphasis Can Lead to Neglecting Other Metrics: If businesses focus only on boosting MRR, they might overlook critical metrics like customer acquisition cost, net promoter score, or product engagement. A holistic view is necessary.
- Lacks Context Without Additional Metrics: MRR, when viewed in isolation, might not provide actionable insights. For instance, a stable MRR with increasing customer complaints might indicate looming churn issues.
In summary, while MRR is undoubtedly a critical metric for SaaS companies to measure predictable revenue, it should be used in conjunction with other key metrics to gain a comprehensive understanding of the health and growth prospects of the business.
KPIs and metrics relevant to Monthly Recurring Revenue
- Churn Rate: Represents the percentage of customers who stop subscribing to a service within a given time frame. A high churn rate can significantly impact MRR.
- Customer Acquisition Cost (CAC): This measures the cost to acquire a new customer. Balancing CAC with MRR helps in assessing profitability.
- Lifetime Value (LTV): It’s the predicted net profit attributed to the entire future relationship with a customer. An ideal scenario is when LTV is significantly higher than CAC.
- Expansion MRR: This metric focuses on the additional MRR generated from existing customers through upselling, cross-selling, or offering additional features.
By monitoring MRR alongside these other metrics, your company can gain a comprehensive understanding of your revenue streams, growth prospects, and areas for improvement.
Final thoughts
Monthly recurring revenue (MRR) is a critical metric for subscription-based businesses, providing insight into predictable revenue, business health, and growth potential. With a strategic approach to tiered pricing, churn reduction, and upselling, companies can effectively increase their MRR and ensure financial stability.
Monthly Recurring Revenue (MRR) FAQ
What is Monthly Recurring Revenue (MRR)?
MRR is a metric that calculates the predictable revenue a subscription-based business can expect to earn every month.
Why is MRR crucial for my subscription-based business?
MRR offers insights into your business’s financial health, potential for growth, and revenue consistency, which are vital for strategic planning and attracting investors.
How can I improve my MRR?
Strategies such as reducing churn, upselling, introducing annual subscription discounts, and offering ancillary services or add-ons can help boost MRR.
How does MRR differ from overall revenue?
While MRR focuses on predictable monthly revenue from subscriptions, overall revenue includes all income sources, like one-time sales or ad revenue.
If my MRR is rising, is my business guaranteed success?
A growing MRR indicates positive momentum, but it’s vital to balance this with other metrics like CAC, LTV, and churn rate to ensure overall business success and profitability.