Monthly Recurring Revenue (MRR) helps you keep track of your business, analyze results, and make informed decisions to improve performance. As the name suggests, we calculate this revenue on a monthly basis, tracking predictable streams of income. This helps a company gauge their financial health by actively keeping track of monthly generated revenue.
Software as a Service (SaaS) companies use Monthly Recurring Revenue as a key metric to monitor and differentiate steady revenue-generating, recurring subscriptions from one-time purchases and other irregular models
Why is MRR Important in a Subscription Business?
MRR embodies an integral role in subscription business by shedding light on a fair estimate of steady returns generated in a month. The importance of monthly generated revenue is paramount, as it is a key metric that investors consider before investing in your business.
Following are the key reasons why MRR is considered an unavoidable factor for SaaS companies:
Predictable Revenue Stream: Organizations will be able to keep a check on their financial health through monthly recurring revenue. This also aids in forecasting future cash flows and planning expenses accordingly.
Tracking Growth: MRR helps an organization in measuring their growth and performance in the market. An exponential rise in this value shows that the company is on the right track and is achieving growth, whereas a decrease shows the customer churn is high due to poor performance. With this data, an organization can rework their business strategies to attain business growth.
Data-driven Decision Making: Hitting financial instability is quite a nightmare in the business world. Having access to the MRR data can help plan your expenses ahead and avoid miscalculating decisions regarding hiring, expansions, etc.
Customer Retention Insights: With monthly generated revenue, you will get insights not only about income generated from customers but also regarding customer churns. A high churn rate is considered a key metric in identifying issues regarding pricing plans, business architecture, product and customer satisfaction, etc.
Attracting Investors: The monthly revenue data significantly influences an investor's decision to invest in a company. Investing in a company that has steady and consistent returns pays off big-time for investors. Hence, a growing recurring monthly income indicates that the company has a loyal customer base and regular revenue.
Performance Benchmark: Monthly revenue consistency often helps companies set performance benchmarks against market standards and competitors.
How to Calculate MRR?
To calculate monthly generated revenue correctly, you need to have two values beforehand: Total number of paying customers and Average revenue generated per user in a month. To calculate the revenue continuity, multiply these two values by each other.
For instance, you can use the following MRR formula to calculate the income:
MRR = Average monthly revenue generated per customer X Total number of paying customers
It is to be noted that the above-stated monthly recurring revenue formula isn’t the only way to calculate the monthly recurring income. You can also measure the value by adding revenue generated by each product or service offered by your company. In addition to this, the method of calculation can vary depending on the revenue you are tracking.
Types of MRR
Subscription-based businesses can track a variety of monthly recurring reviews to measure their financial health. Startups too have pre-defined goals to spot the ‘right’ MRR value to perform good in the market. Some of the major nuances of tracking MRRs in the SaaS industry are listed below.
New MRR: The monthly recurring revenue acquired from new customers who have just subscribed to a product or service.
Churn MRR: This type of monthly generated income helps a company to keep track of the revenue lost due to subscribers leaving a service or product offered.
Expansion MRR: Businesses track this monthly generated revenue to gauge the rise in revenue from customers. Businesses utilize this value to track the revenue that arises when a subscriber upgrades their subscription or purchases add-ons to their current one.
Reactivation MRR: As the name implies, this kind of income is monitored to track revenue generated by customers who previously canceled a subscription but returned, resulting in regaining revenue.
Net New MRR: A company measures its net new monthly recurring revenue to determine the total revenue it generates. To calculate this, first add the new and expansion MRRs. Then, the churn value should be subtracted.
How to Boost MRR Generation?
Increasing monthly-generated revenue can present your company as a profitable and well-performing venture, thereby enhancing its appeal to potential investors. There are several ways to increase the MRR within a company.
Optimize Pricing Plans: There might be multiple options for an organization to increase their monthly revenue, but optimizing pricing strategies always tops the list. By implementing A/B testing or market research, businesses can identify ideal pricing strategies that can attract potential customers.
Customer Retention: By providing excellent customer service with good-quality products, it reduces customer churn and thereby increases revenue.
Expand Revenue Stream: Rather than sticking to one product or service, offering multiple services can diversify the revenue streams. This can guarantee you a higher income, which in turn leads to a higher monthly income.
Monthly Recurring Revenue, therefore, is an important measure that indicates the financial performance, growth, and viability of any subscription-based business. In addition, monthly produced revenue acts as a cash flow tool for SaaS companies; it helps in garnering interest from investors, retaining customers, and making informed business choices. Companies must increase monthly income to ensure business longevity by aligning pricing structures, customer base initiatives, and revenue diversification. Constant tracking of MRR and comprehending its different components allows organizations to be flexible, compete, and remain profitable in the market even in turbulence.
