For time immemorial, recurring revenue has been a concept that people have been familiar with. Be it a recurring television channel subscription, a recurring telephone bill, or a recurring house rent. There are all payments we make every month.
However, with the emergence of the age of the internet, a host of SaaS companies came into the picture, selling unique and innovative services for their customers on a monthly payment plan.
However, an estimated 92% of SaaS startups fail within the first three years from launch. To establish yourself in the SaaS industry, it is important to calculate metrics such as MRR to get a good understanding of the recurring revenue growth of the company.
As a revenue growth forecasting metric, MRR helps companies make sound strategies and marketing decisions that help them stay afloat and flourish in the SaaS industry.
Let us learn about recurring revenue in detail and understand why it is an important component of any successful SaaS company.
So, what is recurring revenue for a SaaS company? Recurring revenue is the total revenue that a company generates every month from its products or services. It is the heart and soul of every subscription business.
It is a predictable long-term income for a SaaS company that is generated from customer subscriptions.
Unlike a one-off sale, such as paid apps and e-books, SaaS companies offer subscription-based services, such as cloud-based services and anti-virus registrations, with a monthly or annual subscription model.
Customers pay a monthly subscription to continue using their software. This makes the subscription model a predictable and stable form of income that comes with a high level of certainty.
Amongst the various KPIs and metrics that SaaS companies track to measure the financial health and growth of the company, MRR is one of the most commonly tracked metrics.
MRR, or Monthly Recurring Revenue, is a metric that calculates the total recurring revenue that a company generates in a month.
Since subscription-based companies rely on monthly sales of their services, simply measuring the total revenue generated does not throw light on the performance of the company.
Factors such as the number of new customers, churned customers, total upgrades, and downgrades do not come into play when the total revenue is calculated.
Dataflo Subscription Dashboard helps analyze the details of your Monthly Recurring Revenue with analysis on Net New Revenue, Reactivations, Upgrades, Existing Revenue, Downgrades and Churn. It also helps to visualize the MRR trend for the last 24 months in a single view.
Get an overview of which customers have paid you more and which ones got churned in a single click. Signup for free with Dataflo and analyze your MRR in less than a few minutes.
MRR includes all these factors and provides a homogenized figure for each month, which acts as a baseline for the company to gauge its current performance and future growth. Here are a few more advantages of tracking MRR.
MRR provides valuable insights into the recurring revenue generated and is a vital tool for companies to determine the future financial standing of the company. However, as simple as the metric looks, there are certain nuances that are easy to miss if you are new to calculating MRR.
If calculated incorrectly, MRR throws up a wrong projection. Based on this data, companies may miscalculate their budgets and strategies, which might be detrimental to them. Let us start with the basics first.
The formula for calculating MRR is as follows:
ARPU, or Average Revenue Per User, is the total average revenue generated from the users. The focus lies on the word ‘Average’. Since there are various customers that subscribe to differently priced subscription plans, in order to calculate MRR, the average revenue is calculated to get an even revenue scale per month.
Now that we have discussed the formula let us look into the components that should be included while calculating MRR.
Analyzing metrics such as MRR is an unavoidable step that businesses should take. Even though it looks like a simple metric at the surface, MRR is very nuanced and is a vital component needed for tracking your company’s growth in the future, or the lack of it.
While several companies track MRR religiously, they don’t correctly analyze the insights and the data provided by it.
It is not enough to track MRR but also vital for companies to take the insights they get from it and create action plans and strategies to improve their recurring revenue and growth in the long run.
Dataflo’s customizable dashboard allows you to visualize and analyze all your essential metrics, such as MRR, Customer Lifetime Value (CLV), and Churn Rate, all in one place. All the necessary data and insights required to grow your company are displayed in a systematic manner for easy reference and analysis.
Dataflo has answers to all your questions, such as “What are the key points to consider?” “What are the warning signals to look out for?” “How should I efficiently analyze the data?”
Our reliable tips on analyzing your metrics ensure that you never miss out on a good opportunity to expand your SaaS business.
Tracking MRR correctly is critical for the success of any business. Incorrectly tracking MRR draws an inaccurate report of finances and could hinder the company’s decision-making abilities.
Let us look at some common mistakes companies make while calculating MRR.
SaaS businesses usually sell their services on a subscription model. They offer their customers to make monthly or annual subscriptions depending on their convenience.
One of the common mistakes that businesses make is that they include the entire annual payments while calculating the MRR for that month.
The annual subscriptions should be categorized as booking and not as part of MRR. Bookings are usually used to determine the cash flow of the company, whereas MRR calculates the recurring revenue that is generated.
Therefore, to convert a booking into an MRR, it needs to be broken down as a monthly payment.
A simple example of this will be if a user makes a payment of $12,000 for the annual subscription to their service in September, and the company adds the entire amount while calculating the MRR for that month.
Instead, such bookings should be divided by the months before calculating the MRR. In this case, $12,000 should be divided by 12, which means the user paid $1000 per month. Therefore, $1000 would be included as the amount to calculate MRR for September.
As the name suggests, MRR calculates the ‘monthly’ recurring revenue. MRR does not yield an accurate revenue report if one-time payments such as setup fees or monthly installments of a single transaction are included while calculating it.
If the customer does not make a recurring payment for a service or discontinues it after a single payment, it should not be included while calculating MRR.
MRR is a metric that calculates the growth of your company and generates insights into the source of your revenue growth. It is not an amount to be treated as an accounting figure or for other tax purposes.
Other components, such as bookings, deferred revenue, and billings, may be included in accounting figures. However, MRR is a metric purely used to analyze the revenue growth of your company and not as an accounting figure.
Every customer of a subscription-based business eventually becomes a delinquent customer. Delinquencies usually occur when the credit card on file for a recurring payment expires and the customer forgets to update the card details.
This results in a delayed payment or the churn out of a few customers.
Delinquent charges are not usually included while calculating MRR at the end of the month since the payment is late or has not come through.
Instead of excluding delinquent charges altogether, they should be put into a different category so that the company can track the revenue lost due to credit card expiration.
Similarly, any transaction fees that are charged on a recurring basis should be put into a separate category and included while calculating the MRR. Transaction fees should be calculated as an expense since these expenses can be optimized.
Offering trials to new or potential customers is one of the most popular marketing tactics adopted by SaaS businesses. However, most customers who sign in for the trial period don’t convert to recurring customers.
Since the customer is not making a recurring payment, trials should be omitted while calculating MRR.
Even if customers who sign in for the trial period convert into recurring customers, the trial period should be excluded while calculating MRR.
SaaS businesses often discounted prices to attract more customers to subscribe to their services. However, some companies add the full price while calculating the MRR.
If a discount has been given to a customer, the discounted price should be included while calculating the MRR for that month. Adding full costs to MRR while offering discounts overstates the total revenue earned for the month or the duration of the billing cycle.
For example, if your service is priced at $500 and you offer a 10% discount, the amount added to calculate the MRR would be $450.
Recurring revenue is a dependable form of income for a SaaS company. As one of the most stable and predictable revenue for an organization, several companies are trying to enter the SaaS industry.
MRR is a simple yet nuanced metric that is an ally to every subscription-based company. If tracked correctly, MRR can accurately analyze the future growth rate of the company and help them create apt strategies to succeed in the market.
Dataflo offers a suite of metrics that can help you track the health of your business's subscription-based revenue. Connect your Stripe or Chargebee account to view subscription analytics and understand your revenue performance.
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