Monthly Recurring Revenue (MRR) tracks predictable, average monthly revenue gathered by a given business from subscribers to its solution or service. While predicting revenue is always somewhat risky, companies that charge their customers via a subscription or anything as a service (XaaS) model often have greater visibility into expected revenue from existing customers.
Further, these organizations can often leverage their calculated monthly recurring revenue to better forecast future income, track overall growth, and make smarter business decisions.
Why is monthly recurring revenue important?
Subscription- and service-based organizations should expect to be constantly adding new subscribers. What can complicate this fact is that, at the same time, these companies will experience some level of customer churn (a drag to revenue growth), and many companies deliver different service tiers at different prices.
MRR accounts for these fluctuations and records business performance in monthly snapshots, making it much easier to identify whether their customer pool and overall income is growing or shrinking and at what rate.
If a new software as a service (SaaS) business notes consistent, positive growth in its MRR over a six-month or one-year timeframe, it can more easily decide to add new staff or expand its offering portfolio.
Conversely, if a company notes a stagnant or steadily decreasing MRR, there likely is some issue that needs to be addressed, such as poor sales communication or the loss of customers due to inadequate service levels.
MRR formula: How to calculate monthly recurring revenue
You can use a couple of strategies to calculate MRR, depending on how your business is structured and which metrics you have available. To fully understand these different approaches, it is important to first address average revenue per account (ARPA) and average revenue per user (ARPU).
These metrics are a means to monitor and predict roughly how much money is being billed to the average customer over a given period, with ARPU offering a bit more granularity. Typically, businesses choose which option they prefer depending on whether they bill their customers a flat account fee or by the number of users active for the service.
With these two terms clarified, we can now identify the formulas to calculate MRR:
Monthly Recurring Revenue = Total Number of Active Accounts x ARPA
or
Monthly Recurring Revenue = Total Number of Active Users x ARPU
Of course, if your business offers tiered subscription services, you’ll want to calculate the individual MRR for each tier and then add these totals together for the total MRR.
Total MRR = Tier 1 MRR + Tier 2 MRR + Tier 3 MRR + … + Tier (n) MRR
Types of MRR
Just as it is useful to track the MRR performance of individual subscription tiers, isolating and paying attention to MRR movement throughout the various stages of a subscription cycle can also be beneficial.
New MRR
This metric focuses exclusively on recently added subscribers in their first month of service. Using this specific type of MRR, you can more easily determine the progress and success of your sales and marketing efforts.
Expansion MRR
Signing on new customers is one of many mechanisms to drive revenue growth. You should also separately track the revenue boost you receive when an existing subscriber upgrades to a higher — and higher-priced — plan.
Contraction MRR
The opposite of Expansion MRR, this type records the corresponding revenue loss when a higher-tiered subscriber downgrades to a lower level of service. (Note: in some reporting schemes, Contraction MRR isn’t recorded independently, instead added into the Churned MRR category.)
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Churned MRR
As you lose subscribers, your revenue will drop accordingly. Paying attention to your Churned MRR will help you identify and respond to issues driving away your customers.
Reactivation MRR
If you can recapture lost subscribers, you should independently track that first month of income for these reactivated accounts — isolating it from your New MRR. You can leverage fluctuations in this specific type to more easily identify what factors or strategies were useful in returning these customers.
Net New MRR
The most complicated type of MRR to track, Net New MRR, identifies the adjusted shift to average revenue levels while accounting for the various increases and decreases that might have occurred over the given month.
Net New MRR = New MRR + Expansion MRR – Contraction MRR – Churned MRR
MRR vs. ARR
Useful in forecasting efforts, an Annual Recurring Revenue (ARR) estimates your subscription income over the next 12 months based on your most recent MRR. However, remember that this projection assumes that processes will remain consistent over the next year—meaning that you won’t experience any fluctuations in customer churn, sales, or upgrade rates.
Annual Recurring Revenue (ARR) = MRR x 12
What is a good MRR?
As is often the case, the answer is subjective and will vary based on your geography, industry, subscription model, competitors, and other contributing factors. However, rather than focus on a specific MRR target, it is often more useful to focus on changes to your month-over-month (MoM) MRR. And typically, a 10% MoM growth rate is a reasonable yet challenging target.
How to increase your MRR
1. Adjust your prices
It often pays to monitor the rate schemes of your industry’s competitors to ensure that you aren’t undervaluing or overvaluing your service. After all, if you can boost your price while staying below your competitors, you’ll likely be able to boost revenues without incurring noticeable churn. Conversely, if potential customers feel you charge too much, they’ll stay away.
At the same time, you should reevaluate your entire pricing model and introduce tiered service or usage levels. If you charge at a per-account level, shifting to a user-based model might be better, particularly if your customers vary greatly in size or service consumption.
2. Keep customers happy
If you’re bleeding subscribers, consider reevaluating your customer service process. Are you responding quickly to questions? Is your billing accurate? Are the staff who are regularly in contact with users or subscribers personable? When communicating with the people who give you money, a little care, concern, and compassion can never hurt.
Similarly, you should evaluate the reliability of your provided service or solution. Are there frequent outages or slowdowns? Are the available features and overall quality still competitive? Are there any changes you could enact to make usage more convenient or intuitive?
Consider routinely conducting surveys among existing customers to see if they are experiencing any reoccurring concerns or issues. Similarly, you could send out questionnaires to canceling subscribers to see if they’ll share what motivated them to look elsewhere.
Ultimately, if you know why your customers are leaving, you are more likely to be able to win them back eventually.
3. Know what’s going on via reports and analytics
If you plan on making business adjustments to tweak your subscription revenues, it’s wise to know what you’re doing. Routine reports can help you monitor current trends and overall progress. When you can dissect your MRR along the varying types discussed above, you’ll be in a much better position to isolate what is and isn’t working. After all, a dropping MRR could easily be caused by poor sales or high churn.
Tracking these key performance indicators (KPIs) in more detail can also help you monitor the success of the measures that you have taken. Did that recent marketing campaign increase your New MRR? When you added that chatbot to your website, did customer satisfaction increase while Churned MRR decreased?
4. Sell more
Easier said than done. But if you’re struggling to capture new subscribers, you might need to expand your sales force. Or you could generate greater revenue by adjusting the incentive structure for your current sellers.
When conducting marketing campaigns, do some A/B testing to see which messages or strategies resonate with potential customers. Do buyers want more details about features and capabilities? Are they more likely to react to advertising copy on social media or in an email? The more you know what motivates these potential subscribers, the more easily you’ll convince them that your solution is right.
Get the MRR insights you need to grow with Invoiced
We recommend relying on a financial platform that offers comprehensive reporting and analytics capabilities to keep you and your business adequately informed about your MRR and general accounting information. Ideally, the solution you choose will make monitoring your subscription services—and corresponding billing efforts—rather intuitive without sacrificing the granularity needed to promote smart decision-making.
Whatever software you buy, you should avoid any subscription billing software bogged down with hidden fees. These unexpected costs can eat through your revenue growth surprisingly fast.
Invoiced’s Accounts Receivable Automation Software is easy-to-use and streamlines and centralizes your revenue-related reporting efforts, including those for MRR. With customizable dashboards, our platform lets you focus exclusively on the KPIs that matter most to your business.
Even better, our system’s automation capabilities will simultaneously accelerate your revenue-gathering processes while improving accuracy and performance — helping to make those subscriber and churn totals much more attractive.
Schedule a demo today to see how Invoiced can help improve your MRR.
