What is MRR?
If you are new to the SaaS industry, then you have probably heard the word ‘Monthly Recurring Revenue (MRR)’ thrown around a bunch of times. This is because MRR is the life and blood of every major SaaS or subscription-based company.
Before we get into the specifics, let us tackle the most important question— ‘What is MRR?’
MRR, or Monthly Recurring Revenue, is a performance metric that calculates the average recurring revenue generated from the total number of active customers by a business in a month.
MRR is the Holy Grail when it comes to metrics because it analyzes the financial health of the company and its potential to grow in the upcoming months. Tracking MRR gives the company a good idea as to how their service is faring among their customers. MRR is a long-term KPI that tracks the company’s financial health in the long run rather than focusing on short-term profits.
A subscription-based business sees much fluctuation in its revenue every month. New customers subscribe to the service on a monthly, or annual basis. Some may upgrade their plan, while some customers might churn out. This makes calculating the monthly revenue of a service difficult.
MRR calculates the average recurring revenue generated from the customers in a specific month. This makes it easy to determine the performance of the business and also helps the company analyze the percentage of increase or decrease in the revenue they are generating.
MRR or monthly recurring revenue is one of the top 20 sales KPI for SaaS growth teams to track in 2022.
Types of MRR
Every subscription-based business has a diverse subscription behavior. The company witnesses the acquisition of new customers, plan upgrades, or even subscription cancellations and churn outs. Calculating MRR showcases the relationship between customers and their subscription patterns.
Be it a rise or fall in MRR, it is imperative for the business to discover the root cause for it and the impact it has on the entire company. Breaking down the MRR into different types gives the business more insights into their customer’s subscription behavior, revenue flow, and the company’s overall financial health. Let us look at the types of MRR that every SaaS companies should track.
New MRR calculates the monthly recurring revenue from brand-new customers. This enables the company to see how many new customers subscribed to their service and which plan they find the most lucrative.
New MRR indicates the company about the cash flow of the business and provides insights on the future financial growth of the company.
For example, if 15 new customers subscribe to your $250 monthly plan and 10 subscribe to your $400 monthly plan, your New MRR would be $7750.
Expansion MRR calculates the additional revenue generated from existing customers through the following activities:
- Upselling: When an existing customer moves from their free or lower-priced plan to a higher-priced plan.
- Cross-selling: When a customer purchases a non-core item that is marketed by your business, such as offering premium support or marketing additional products or services.
- Add-ons: When customers subscribe to additional recurring add-ons that are not included in their existing subscription plan.
- Reactivation of old customers: When old customers who had previously deactivated their subscriptions reactivate them.
Expansion MRR is an indicator of customer loyalty to your service, which increases the Customer Lifetime Value (CLV) in the long run. One of the most significant advantages of Expansion MRR is that it generates no Customer Acquisition Cost (CAC) since they are all existing customers who are helping the company in generating more revenue without much effort.
Upgrade MRR calculates the increase in monthly revenue from existing users from their current plan to a more premium plan.
If a customer upgrades their regular $500 per month plan to $1000 per month plan, the expansion MRR would be the difference between the two, which is $500.
An increase in Upgrade MRR means that your existing customers are finding value in your product. Having the right set of features that appeal to your customers and adding new features to your service encourages customers to upgrade their plans.
Reactivation MRR calculates the monthly revenue collected by reactivated subscriptions from customers who had previously canceled their subscriptions.
Reactivation MRR shows that older customers who had previously deactivated their subscriptions found more value in your service compared to the other services available in the market.
For instance, if 3 customers reactivate their $400 subscriptions that had been canceled previously, the reactivation MRR would be $1200.
A rise in Reactivation MRR means that more churned-out customers are being drawn back to the service through effective marketing campaigns. Analyzing the reason for their deactivation and reactivation gives the companies a better understanding of the expectations and needs of the customers.
Contraction MRR calculates the reduction in revenue caused by a downgrade in subscriptions and churn-outs compared to the previous month.
An increase in Contraction MRR may be because of a lack of customer satisfaction with the service or the mediocre quality of the services being offered.
A decreased Contraction MRR is a good indicator of a well-functioning business. It indicates that most customers are satisfied with the service and are continuing their monthly subscriptions.
Churned MRR calculates the loss of monthly revenue caused by the cancellation of subscriptions by existing users. Churn MRR is calculated by adding the MRR of the canceled subscriptions for a particular month.
Churn MRR is often tracked to calculate the churn percentage, known as the Churn Rate. The Churn rate provides a clear picture of the impact of the total churns on your business.
Churn MRR is an essential metric for subscription-based services with a tiered pricing plan. The value of each customer varies for a business based on the plans they have subscribed to. If you calculate the number of churns irrespective of what pricing plan they were subscribed to, you will not be able to track the actual impact it has on the business.
For example, if you lose 3 customers who had subscribed for the $300 plan, the total value of cancellation would be $900. On the other hand, if you lose 6 members who had subscribed for the $750 plan, the total value of cancellation would amount to $4500.
Calculating the Churn MRR identifies which plan is incurring the most cancellations. This allows you to troubleshoot your service and add more features or perks to make it more appealing to the customers.
Net New MRR
Net New MRR calculates the net revenue generated from new customers in a given month. Calculating Net New MRR shows how the business is performing and estimates the growth rate of the business in the future.
Net New MRR is calculated by adding the expansion MRR and New MRR and excluding churned MRR.
Let’s say your company gains 7 new customers who have subscribed to the $200 plan last month. 4 of your existing customers upgrade from a regular plan of $200 plan per month to a $400 monthly plan. 2 customers who had subscribed to the $200 monthly plan churned out.
The calculation for the Net New MRR would be as follows:
New MRR= New customers * MRR per new customer
New MRR= 7 * 200= $1400
Expansion MRR (Upgrade) = 4 * $400 = $1600
Churned MRR= 2 * $200= $400
The Net New MRR= New MRR + Expansion MRR – Churned MRR
The Net New MRR= $1400 + $1600 - $400 = $2600
Why is tracking MRR important for SaaS businesses?
MRR is an essential metric for SaaS businesses to track because it indicates the company’s financial health and the quality and demand of the service in the market. If the company has a good MRR, it suggests that more people are happy with the quality of the service and are willing to pay for it through an invoice every month. Let us look at some more key points on the importance of MRR for a SaaS business.
In a subscription-based business, people usually subscribe to a service on a monthly basis instead of a one-off sale, where they make the payment in full at the time of the purchase. This means that the company gains small amounts of revenue every month from its customers. Therefore, the company needs the insights generated from MRR to see if its service is performing well and keeping up with its customer’s demands.
MRR helps forecast the revenue for the upcoming month based on the monthly financial performance analysis of previous months. Tracking MRR also helps calculate the Annual Recurring Revenue (ARR), which tracks the recurring revenue that a service generates in a year.
Tracking ARR makes it easy for companies to figure out the cost of various subscription plans and predict the total sales the company could expect to make in the future. ARR also enables a company to comprehend the impact their choices have on the customers’ purchasing behaviors.
Business is about generating revenue through your products and services and reinvesting it into the company to grow the business. MRR calculates the total revenue that the business is generating in a month. It also enables the executives to determine which area of the business to expand and where to cut back on expenses.
How to calculate MRR
To calculate MRR, you must multiply the average revenue generated from each customer by the total number of users for that specific month.
For example, if you are generating an average revenue of $700 from 6 users each month, your MRR would be $4200.
6 users × $700 per month =$4200 MRR
How to increase MRR?
MRR provides crucial insights to the company, however, not taking steps and creating new strategies based on the insights gained from calculating MRR could become highly disadvantageous to the company in the long run.
Here are some methods on how to increase MRR and grow your business steadily.
The majority of SaaS companies do not spend enough time discussing what the appropriate price for their service should be. This leads to companies underpricing their services.
Before deciding the price for your service, you first need to understand the true value of your service. Analyzing the marketing strategies, the margin of the service, and the customer price sensitivity are crucial factors you should weigh before determining a price for your service.
As far as the frequency of your price raise is concerned, it depends on various factors such as your market share, the frequency at which you release new features, the loyalty of your customers, and so on. Depending on the kind of business you own, the appropriate frequency for raising your prices may vary.
The bottomline is that you should know the value of your product and increase its price accordingly. If you have a quality service, increasing the price will attract more serious customers and reduce the churn rate.
SaaS businesses should upsell their products to their customers. It could be in the form of add-ons or attractive features for higher-level plans.
Businesses should tap into the perfect time to upsell their product to attract more customers. Approaching customers with the upselling prospect when they have achieved a financial milestone is an excellent way to draw in more customers, thus increasing the MRR of the company.
Get Rid of your free plan
Several businesses offer their customers free plans as a marketing tactic. Although it helps raise awareness about the service, people seldom upgrade from their free plan to the paid version.
The fear of losing their existing free plan customers usually stops companies from pulling the plug on free plans. However, since they are not paying customers, they do not directly contribute to the growth of your business.
To increase the MRR, you need to ditch the free plan. If your product is high-quality, you will build a community of loyal customers willing to pay a fee for a quality product.
‘Unlimited’ services are a dream come true for customers worldwide, but not so much for businesses. If your product generates good value, the price of the product should also increase accordingly.
Most businesses are constantly introducing more features to their product to keep their customers happy. To give such valuable products away for an ‘unlimited’ package is simply giving up on a stable revenue source.
Removing the unlimited package is a great way to increase your MRR and value your products at the price they deserve to be marketed.
How to visualize Monthly Recurring Revenue (MRR) in a Dashboard?
Take a look at the data visualization for more on how to track monthly recurring revenue in a Dataflo dashboard.
MRR is a very crucial metric for SaaS businesses. Though it looks like a straightforward metric, it has a lot of nuances involved in making the right calculation. A wrong calculation might lead to wrong projections. Since companies rely on MRR to forecast the financial growth trajectory, calculating MRR incorrectly might impact the company adversely and might result in incurred losses.
MRR also plays a pivotal role in calculating ARR which showcases the recurring revenue for a year. ARR helps track the momentum of a business and, if calculated correctly, portrays a clear picture of the company’s financial health and enables them to spruce up their decisions on further investments, budgeting, and scaling.