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Monthly Recurring Revenue (MRR)

What is Monthly Recurring Revenue (MRR)?

Monthly Recurring Revenue (MRR) is the predictable total revenue a company expects to earn from all active customers every month for offering them valuable products and services. This financial metric helps companies to measure the normalized monthly revenue. 

This metric is commonly used by SaaS companies that earn revenue using a subscription-based business model. MRR is generally made up of 3 main components that indicate how the revenue is earned. The 3 components are:

  1. New MRR: New MRR earned from new paying customers
  2. Expansion MRR: New MRR earned because of upgrades from existing customers
  3. Churned MRR: MRR lost because of subscription cancellation and downgrades

Formula for MRR

The calculation process of MRR is very simple to follow. Below is the general formula that you can use to calculate MRR:

Monthly Recurring Revenue (MRR) = Number of paying customers * Average billed amount.

As the company grows, it is recommended to track the changes in Monthly Recurring Revenue and the various factors that bring about the change in MRR. 

For instance, a subscription company lost some revenue due to cancellations and downgrades (Churned MRR), earned some revenue from new sources due to upgrades from existing customers (Expansion MRR), and earned new revenue due to new customers (New MRR). If you want to calculate the Net New MRR, you can do so by using the following formula:

Net New MRR = New MRR + Expansion MRR - Churned MRR

MRR vs ARR: How to calculate each?

Annual Recurring Revenue (ARR) is generally determined for yearly contracts that have a minimum duration of 1 year. Whereas, if the contract duration is less than 1 year, it isn't beneficial to track ARR. MRR provides a more accurate depiction of sales and revenue in these short-term contracts. 

You can calculate the ARR by adding all the annual recurring charges from all the paying customers.

Importance of MRR for SaaS businesses:

MRR is an important metric for SaaS business because of the following reasons:

  1. Monitoring the performance of a company

A month is generally considered a good time to assess a SaaS company's growth. MRR data can help you track the month-over-month revenue trends and offers insights into the company's financial performance. This can also help you to suggest actions or modifications to your business plan to maximize business growth.

  1. Forecasting the upcoming revenue 

MRR is an essential metric that can help project acquired sales forecasts and help you plan for long-term and short-term business growth. Once you have a revenue forecast, it is easier to decide the steps you need to take to maximize the revenue even further.

  1. Setting up budgets

As discussed in the previous point, MRR can help predict a company's revenue. It can be used to set up a budget for the company's expenses. MRR can also help a company to understand which areas of the business need more spending and where you can cut back.

MRR: Benchmarks & Examples

Below are some benchmarks that can help a company to understand its MRR:

  1. A growth rate of 15 - 20 % in MRR is a decent goal for pre-Series A / post-Seed SaaS-based companies. 
  2. A growth rate of more than 20 % in MRR is considered difficult to attain, but it is possible. This MRR growth rate will increase ARR from $1- $100 million in 7-10 years.