Recurring Revenue is the lifeline for any business, whether online or not. In a SaaS-based business model, recurring subscriptions provide a steady flow of revenue covering to the company. Netflix, Amazon Prime, HBO Max, and all tech giants rely on monthly recurring revenue model to grow their business.

Instead of focusing on acquiring new customers, it is much easier and better to focus on existing customers to continue generating a solid stream of revenue. 

To run a successful SaaS business, you must consider a couple of aspects, such as marketing, new subscriptions, and appealing to a broader range of audiences.

Furthermore, you will need a solid product and won’t have to worry about anything else; the customers will return and keep using your product/service.

To keep your SaaS on track, especially the one depending on monthly subscriptions, you will need to use some key metrics such as MRR. Metrics are vital in analyzing the data and knowing if your business is growing in the right direction. 

In today’s article, we will look into all aspects of Monthly Recurring Revenue and how it impacts your SaaS.

Content we will be covering:

• What is MRR?

• Calculate MRR

• Example of MRR

• Types of MRR

• Importance of MRR

• How to increase MRR

What is MRR? 

MRR is a short form of Monthly Recurring Revenue, the total predictable revenue a business generates from users each month. Active subscriptions, promotions, vouchers, and add-ons are all included, but one-time fees are not. Think Netflix, Amazon Prime, Microsoft 365 and other SaaS companies charging on a month-to-end basis.

GAAP(Generally Accepted Accounting Principles) doesn’t recognize MRR, but when it comes to investors, they are pretty interested in it. It helps them test the forecast of the company’s finances and its potential growth.

Most SaaS(Software-as-a-Service) depends on monthly subscriptions, with new customers signing up and some old ones churning out. This causes fluctuation in your revenue, and to calculate this, you will need MRR.

To predict future revenue, MRR comes in handy. Also, you can convince potential investors to join your team and fund your SaaS as they can see your growth rate and consistency with the MRR.

Calculating Monthly Recurring Revenue(MRR) :

MRR is easy to calculate. Multiply the total number of customers by Average Revenue Per User (AVPU). 

MRR= No of Users*AVPU 

For Example, you have 10 subscribers, and they have a subscription plan of $100 per month.

Your MRR= 10*$100=$1000

For yearly subscriptions, divide the annual plan subscription price by 12 and multiply the result by the total number of users to get the MRR.

Types of Monthly Recurring Revenue(MRR):

MRR will help you in various aspects of revenue forecasts and expanding your business. From a Startup to a well-established enterprise, all companies stand by MRR. A consistent MRR ensures that a company can forecast its future revenue with accuracy.

To completely understand MRR, you must familiarize yourself with its different types. It will help you track the factors impacting your revenues. To analyze the fluctuations in MRR, you must track each of its components. This will give you a better insight into your revenue, customer relations, and business performance.

New Monthly Recurring Revenue(MRR) :

The revenue generated with acquired customers in a month is New MRR. 

For Example, if you have gained 5 customers under a $500 subscription.

New MRR= No of customers gained*Subscription amount gained. 

New MRR= 5*$500

New MRR= $2500 

Upgrade MRR:

Extra revenue from customers that have upgraded to a higher subscription over a month is Upgrade MRR. 

For Example, suppose a client is on a $50/month basic plan and decides to upgrade to a $100/month premium plan with a $25/month add-on.

Upgrade MRR= $100-$50+$25

Upgrade MRR=$75

Downgrade MRR:

To calculate reduced revenue when a customer downgrades from a higher plan such as a premium plan to a basic one can with Downgrade MRR.

For example, if a client downgrades from $400 to $200, then the Downgrade MRR will be

$400 – $200 = $200.

Downgrade MRR= $200

Expansion MRR: 

Expansion MRR calculates additional income generated by extra offers such as add-ons, boosting sales, and cross-selling. Positive Expansion MRR means that you could convince your existing customers to invest in more of your products. You can also judge the satisfaction of your customers with your service and if they trust your product with expansion MRR.

To Calculate growth expansion MRR, you can use the following formula:

Expansion MRR = Expansion MRR in that month / Total MRR at the beginning of the month * 100

For Example:

You earn extra revenue of $20k through your customers. MRR of that month is $700k.

Expansion MRR= ($20k/$700k)*100

Expansion MRR= 2.9%

Reactivation MRR:

The revenue from churned users resubscribed to your service is Reactivation MRR. It indicates that you are going in the right direction as you have regained the trust of former users.

To calculate Reactivation MRR, use the following formula:

Reactivation MRR= Number of churned customers reactivat*Subscription fee per month. 

For Example, if Your Number of churned customers reactivated is 5 and the subscription per month is 50$, the Reactivation MRR will be:

Reactivation MRR= 5*$50=$250 

Churn MRR:

Total Number of revenue lost due to cancelation of subscription over a month. 

To calculate Churn MRR, use the following formula:

Churn MRR= Number of customers canceled subscription * Subscription amount lost per month.

For Example, your total number of customers that deactivated/canceled your service is 3, and the amount of subscription paid is $1000/month; the Churn MRR is: 

Churn MRR= 3*$1000 = $3000

Net New MRR:

Last but not least, Net MRR shows whether your company grew or shrank in a given month compared to the prior month. 

To calculate the Net MRR, you can use the following formula:

Net New MRR = New MRR + Expansion MRR – Churned MRR. 

Negative Net New MRR signifies that you have lost revenue, and positive Net New MRR indicates that your revenue has increased.

Let’s look at an example for better clarity. Suppose in a month you have acquired 5 users, 10 customers have upgraded from the basic $100/month package to the premium $200/month package. But, 3 clients paying $200/month unsubscribed. The Net New MRR will be:

Net New MRR= $500 + $1000 – $600= $900

Importance of MRR:

With MRR, you can track the growth of your business and calculate the potential forecast revenue to get you on the right track. Let’s explore some other aspects in which MRR helps SaaS and why it’s important.

Tracking Performance:

SaaS usually runs on monthly subscriptions, which is why a month is a significant amount of time for it. A week is too brief, and a year is too extensive to check your company’s performance. On the other hand, a month is a sweet spot that will help you stay in tune with the trends and focus on your customers’ pain points. You will need to track your monthly performance to ensure cash flow and build a long-term sustainable business model.

With the help of MRR, you can track monthly growth and have insight into the financial health and customer experience. It might seem like a hassle analyzing the finances every month, but if you want your business to succeed, you will need to keep a close eye on your MRR. 

Forecasting: 

MRR is for both taking short and long-term projections for your business. With the help of MRR, you can forecast future revenue and the modification you need to enhance your sales. You will be able to check if your sales are going in the right direction and if you are making the right decision for your business.

Budgeting:

Budgeting can make or break any business. You must’ve heard stories of companies going belly up because they ran out of funds or investors pulled out. The reason behind that is poor budgeting which means spending more than your income.

This is where MRR comes in; it assists you in analyzing your financial situation and seeing a true depiction of the assets you can reinvest in your business. Alongside that, you can focus on the aspects where your business might be lacking and spend your time and resources to make it stronger.

For Example, if your MRR has increased and the New MRR is on the decline. This means that your current customers are happy with your service, but the acquisition of  new customers is low. Thus you should spend more resources toward lead generation campaigns.

How to Increase MRR:

Now let’s get down to the tips and tricks to increase MRR and help your business flourish.

Remember the types of MRR we discussed earlier? Now you will put them to good use.

With the help of increasing and improving types of MRR, you will be able to boost your MRR.

Get New Customers:

Keeping your customers happy and satisfied with your product is essential, but you also need new customers. With the help of MRR, you will be able to land the resources needed for lead generation and help you get more customers.

Increasing MRR goes hand in hand with the number of customers you have.

Winback Churned Customers:

Types of MRR you will need to improve: Reactivation MRR 

There are two reasons for any subscription cancelation:

Voluntary cancelation:

When the customers deactivate their account.

Involuntary cancelation:

When the payment fails and is not updated, the subscription gets canceled.

In both cases, your goal is to get your customer back and make your product irresistible to your customer. When you are able to get your customers back, the MRR will increase.

Reducing Churn:

In any SaaS, Churn is inevitable, but if your Churn gets higher than 10%, it offsets gains from new customers. Which makes it quite challenging to create sustainable growth.

You will need to keep your customers stay put by focusing on your service and giving them the best experience. Because if you cannot keep your churn level low, you won’t be able to see positive growth. 

Summing Up:

MRR is the quickest way to get insight into any SaaS or a monthly subscription-based business.

With the help of MRR and its different types, you can look at the complete picture of where your business stands and how you can make its future brighter. On top of that, you will be able secure funding from your dream investors.