Monthly Recurring Revenue (MRR) is a critical metric for any subscription-based business model, including SaaS (Software as a Service) companies. It represents the amount of revenue that a company can reliably expect to receive every month based on its current subscribers.
Here’s a breakdown of how MRR is typically calculated and why it’s important:
MRR is calculated by multiplying the number of active subscribers by the average billed amount per user. For instance, if a SaaS company has 100 customers, each paying a monthly subscription fee of $10, the MRR would be $1,000.
Why MRR is Important:
- Predictable Revenue Stream: MRR provides a business with a predictable stream of income, which is crucial for cash flow management and forecasting.
- Growth Measurement: It is a key performance indicator (KPI) that companies use to measure their growth and success over time. Increasing MRR signifies that the company is growing, while a decline might indicate that there are problems with customer acquisition or retention.
- Financial Planning: It aids in financial planning and budgeting. With a clear understanding of the revenue that will be coming in each month, businesses can make more informed decisions about where to allocate resources.
- Valuation: For startups and companies looking to raise capital, MRR is often a metric that potential investors look at to assess the company’s performance and future potential.
- Customer Metrics: MRR can be further broken down into metrics that provide insights into customer behavior, such as New MRR (from new customers), Expansion MRR (from existing customers who upgrade), and Churned MRR (lost from customers who downgrade or cancel).
Adjustments in MRR:
To get a more accurate picture of MRR, companies will often calculate additional variations such as:
- Net New MRR: Takes into account new sales, expansions, contractions, and churned MRR within the month to provide the net change in MRR.
- Committed Monthly Recurring Revenue (CMRR): This includes MRR plus expected revenue from upgrades and minus expected churn, providing a more forward-looking perspective.
MRR is a foundational metric for the health of a subscription business and is often accompanied by other metrics like Annual Recurring Revenue (ARR), which is simply MRR multiplied by 12, to analyze the long-term revenue perspective.