SUBSCRIPTION FINANCE

Recurring Revenue Optimization: The Guide to Monthly Recurring Revenue

What is Monthly Recurring Revenue, or MRR?

Monthly recurring revenue (MRR) is income that a business can count on receiving every single month – in other words, predictable revenue. It represents the value of all your customer relationships, normalized to a month.

Why is MRR important for a subscription business?

Monthly recurring revenue is arguably the most important metric for subscription businesses – and something that investors (and Wall Street) love to see. MRR can provide valuable insights into sales and cash flow dynamics.It also forms the foundation for calculating CLV (customer lifetime value), projecting future revenue, assessing ASP (average selling price) trends, and more. Smart MRR analysis can also help uncover a range of revenue opportunities.

For Example:

A typical customer base usually includes customers extracting phenomenal value who are ready for an up-sell. It also has customers receiving good value who are excellent candidates for buying more products. It might also include customers who are getting low value and are most likely to churn, unless they receive a down-sell offer. All of these opportunities are included in MRR analysis.

MRR can be used to answer many other important questions: Is my business growing or contracting? How much deferred revenue am I building into my revenue base that I can use to drive further growth? Why is my recurring revenue increasing or decreasing? Is it a result of larger contracts? Fewer discounts? A new product?

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How To calculate MRR

To calculate your monthly recurring revenue, simply multiply your total number of paying users by the average revenue per user (ARPU).

Monthly Recurring Revenue Formula
Number of Paying Users x ARPU = MRR

Pretty easy, right? Well, let’s make sure there are no doubts by looking at an example.

Imagine you’re an emerging SaaS company with 2,358 customers who have each paid $65 in onboarding fees and an average of $149 per month to use your service. How do you calculate your monthly recurring revenue?
Well, first, you’re gonna completely ignore that $65 onboarding fee! Why? Because, as you may remember, one-time fees don’t count when calculating MRR.
Instead, you’re just going to focus on your number of paying customers (2,358) and the average amount they pay for your service per month ($149). Then, you’re gonna plug those numbers into that formula and voila!

2,358 Paying Users x $149 = $35,1342 of Monthly Recurring Revenue

Different types of MRR

When analyzing the financial health of your company, there’s more than one way to use MRR to draw valuable insights. Here are four additional types of MRR you can calculate.

New MRR
New MRR is recurring revenue that comes from new customer acquisitions. For example, if you add a new customer to one of your monthly subscription plans, then the revenue they contribute is considered new MRR.

Expansion MRR
Expansion MRR comes from upselling or cross-selling to existing customers. So, if one of your current customers upgrades their subscription by adding more users to their account that revenue counts towards Expansion MRR.

Churn MRR
Churn MRR is revenue that decreases due to downgrades or gets lost due to canceled subscriptions. As you know, churn is the enemy of all subscription businesses and should be monitored closely. So, keeping an eye on Churn MRR is essential.

Reactivation MRR
Reactivation MRR is revenue that is recovered after reacquiring past customers. This can be done through email, retargeting ads, or even just reaching out to them on social media. And because the money you put into those reacquisition methods can add up quickly, it’s good to stay on top of Reactivation MRR as well.

How analyzing MRR can help uncover revenue opportunities

Smart MRR analysis can also help uncover a range of revenue opportunities. For example, you can use this metric to help determine which customers to target for future upselling, cross-selling, and downsell opportunities. On top of that, MRR can be used to answer important questions, such as:
  • Is my business growing or contracting? How much deferred revenue am I building into my revenue base that I can use to drive further growth?
  • Why is my recurring revenue increasing or decreasing?
  • Is it a result of larger contracts? Fewer discounts? A new product?
  • Key Takeaways

    Monthly recurring revenue is one of the most important metrics for subscription businesses. By measuring and analyzing this metric for your subscription business, you can stay on top of the information your investors care about most.

    To calculate MRR, use this simple formula: Number of Paying Users x Average Revenue Per User = MRR

    When you have that number, you’ll be able to make smarter business decisions based on predictable revenue. But, also, don’t stop there!
    You can make even smarter decisions by tracking other key metrics that are essential to subscription businesses.

    Those metrics include total active customers, total active subscriptions, and total contract value (TCV). To learn more about why those metrics are also worth your attention, check out our complete guide on The Fundamentals of Subscription Finance.

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