Pricing your SaaS company is an integral part of ensuring that you are profitable and making business decisions focused on future revenue. Pricing plans give you the chance to get predictable revenue in any given month. Your customer base growth can then impact the total number of annual contracts or monthly contracts you have, which in turn increases your cash flow.
Monthly recurring revenue is a SaaS metric that can be used to help track the pricing from your existing customers and the average revenue that those customers generate. In a subscription-based business, MRR is one of the most important metrics to track. In this article, we’ll help you understand MRR and how startups, small businesses, and enterprises alike can all benefit from tracking MRR.
What Is Monthly Recurring Revenue?
Monthly recurring revenue, or MRR, is the amount of predictable money you receive each month from subscription plans. It’s a common metric used in software as a service, or SaaS, companies that offer customers the use of a platform for a monthly or annual cost.
MRR is often used alongside ARR, or annual recurring revenue. The ARR is the total recurring revenue for the year, while MRR breaks it down to each month, which is typically the length of a subscription contract.
There are many benefits to an MRR model. It provides you with more insights into your business and your customer base. It also allows you to build momentum, as the growth percentage helps you learn if you are gaining new customers or if you are still struggling to get new business in the door. And the data gathered from MRR allows you to make better decisions in your business with the right information to perform business valuations.
Another major benefit of tracking MRR is the incentives it can give to your sales teams. It gives your sales teams a clear metric of their goals for the month. It also incentivizes marketing and customer service teams, as customer retention is key to reducing churn and maintaining steady levels of MRR.
The MRR Formula
Knowing your MRR helps you figure out a lot of important information about your business. However, the key is to do it correctly — otherwise, the data is useless.
In order to track MRR accurately, you need to have a clear picture of your finances. Being accountable for revenue and tracking MRR requires the use of a formula. Thankfully, the formula for tracking MRR is simple, so you can calculate MRR quickly to help you get a real sense of your metrics. The MRR formula is:
MRR = Number of Customers x Average Billed Amount
Why Is MRR an Important Metric To Monitor?
MRR is one of many key marketing metrics that you should be monitoring on a regular basis. MRR is an important part of revenue operations and gives you the most accurate picture possible of the revenue potential that your business has in any given month.
MRR is helpful because it is a monthly metric. It’s a good time period to track data through, as a year can be too long and a week or a day is too short. Also, most customers prefer to pay for their subscriptions on a monthly basis rather than in a large lump sum — especially if there is a higher price tag associated with the cost of service. MRR tracks trends month over month and provides business leaders with insights into your financial metrics and performance.
Another reason that MRR is important to track is that it plays a major role in your forecasting. Sales forecasting is the practice of calculating what your potential sales revenue could be in the future. MRR tells you how much revenue you can expect to bring in each month and provides a steady foundation for building up your sales program. It helps you predict the next month’s revenue with better accuracy.
Finally, MRR is helpful when it comes to putting together your budgets. Because MRR gives you the amount of revenue flow you can expect each month, you know how much money you have to work with as you plan out your company expenses. It gives you some data to back up your spending decisions and helps you make more reliable budgets.
The Different Types of MRR
Now that you know more about the value MRR has as a metric, let’s discuss some of the different types of MRR your business can have. Each of these can change over time: increasing with new customer acquisitions and upgrades, and falling because of downgrades, cancellations, and customer churn. Let’s look at the types of MRR now.
New MRR refers to the additional revenue that you gain each month when a new customer signs up for your service or becomes a monthly paying customer. Each new customer contributes to the new monthly recurring revenue that you have coming in and increases your total MRR for each month.
In order to calculate the new MRR, you simply need to multiply your new subscriptions and the monetary amount of the monthly plan:
New MRR = Number of new subscriptions x Cost of monthly plan
Upgrade MRR refers to additional MRR coming in from existing customers who have upgraded their plan. When you have tiers or levels of subscription that a customer can sign on with, they can upgrade their subscription at any time, and the monthly upcharge changes your MRR.
This can also address the costs of add-ons or additional subscription packages that existing customers purchase.
To calculate your upgrade MRR, you first need to calculate the difference in cost between the original plan and the upgraded plan and add that number to your total MRR:
Upgrade MRR = Cost difference between original plan and upgraded plan + Total MRR
Expansion MRR is the additional revenue that your company gains from your existing customers each month. This revenue can come from add-ons, upselling, and cross-selling. It’s a great way to increase MRR as it comes from existing customers, not new customers, which can be expensive to bring into your business.
You can calculate expansion MRR growth by dividing your expansions by total MRR at the end of the previous month, then multiplying it by 100:
Expansion MRR = (New revenue from upsells and cross-sells / Total MRR at the end of the previous month) x 100
Often, SaaS businesses have the option of holding a subscription for a few months or will allow a customer to deactivate their subscription with the ability to reactivate it at any time. This is a good strategy as it allows you to regain customers who previously churned from your business. You can gain back revenue that you had in your MRR but lost in the past without needing to find a brand new customer.
In order to calculate reactivation MRR, follow the same formula as the new MRR, multiplying the number of customers and the price they pay.
Reactivation MRR = Number of reactivated customer plans x Cost of monthly plan
Contraction MRR is a loss calculation. When a customer cancels their subscription, pauses their subscription, uses free credits or discounts, stops recurring add-ons, or downgrades to a lower-priced plan, you lose part or all of the expected MRR that you want to receive each month.
To calculate contraction MRR, you first need to figure out the number of customers who are downgrading or canceling (contracting) their subscriptions and the monthly cost of those subscriptions. The sum total of those downgrades and cancellations is your contraction MRR.
Contraction MRR = Downgrade MRR + Cancellation MRR
Customer churn refers to the percentage of customers that leave your business, stop using your service, or cancel their subscription within a certain amount of time. When someone cancels their subscription with you, you lose a customer and their recurring revenue that contributed to the total.
Revenue churn is a serious problem that you must constantly work to overcome. Focusing on customer service, providing value, and clear communication can help reduce your churn rates. To calculate churn, you need to total up the number of customers who have left during a given period (usually a month) and multiply this by the cost of their plans.
Churn MRR = Number of customers who canceled plans in a given month x Cost of monthly plan
Net New MRR
Net new MRR is a metric calculation that tracks how much your revenue has grown or shrunk from one month to the next. By comparing the current month to the previous month, you can determine exactly how much your MRR has grown monthly. When you have a negative net new MRR, you have either downgraded, contracted, or churned more customers than you’ve gained or upsold.
To calculate your net new MRR, you first need to figure out your new MRR and your expansion MRR. Add those two solutions together and then subtract your churned MRR to get your net new MRR.
New New MRR = New MRR + Expansion MRR – Churned MRR
Increase Your Company’s MRR With Sales Assembly
MRR is a key metric that helps you calculate monthly recurring revenue from customer retention. Rather than having a high acquisition cost for new customers, you can focus on upgrades to current customers and create a sustainable business model that focuses on MRR calculations for monthly revenue calculations to track your growth rate.
At Sales Assembly, we believe in helping B2B Tech scale better. We want you to get the most out of your bookings and subscriptions. Through membership, your team will get the training and skills to improve cross-selling, reduce customer churn, and track MRR growth. And your leaders and operators will get access to advisory and best practices from the best in B2B tech. Contact us today to learn more about what we do and how we can help your business scale smarter.