The Monthly Recurring Revenue (MRR) is the predictable, subscription-based income anticipated to be generated by a SaaS company per month.
The MRR—or Monthly Recurring Revenue—is the normalized, predictable revenue that is generated from active accounts on subscription-based payment plans on a monthly basis.
MRR stands for “Monthly Recurring Revenue”, and refers to the proportion of a company's revenue that is stable and predictable from subscription-based pricing, expressed on a monthly basis.
Monthly recurring revenue (MRR) represents the subscription-based revenue that a SaaS company can anticipate to earn per month from their active accounts (or customer base).
The active accounts refer to the monetizable user base belonging to an SaaS business at present, i.e. the customer or subscriber count.
When evaluating the growth profile and financial health of SaaS and subscription-based companies, MRR is a particularly meaningful KPI to track.
Calculating MRR provides a more detailed understanding of the stability of a company’s future revenue and user trajectory and helps shape forecasts.
By analyzing historical trends, a company's weak points can be identified in order for management to make adjustments appropriately to support future growth.
The formula to calculate monthly recurring revenue (MRR) is equal to the average revenue per account (ARPA) multiplied by the total number of active accounts for the given month.
The average revenue per account (ARPA) is commonly used in the MRR calculation – or as an alternative, the average revenue per user (ARPU) could also be used.
Conceptually, ARPA and ARPU are identical in representing the average amount billed to a customer – and for either metric, the formula divides total recurring revenue by the total number of accounts (or users).
It is important to ensure that only “recurring” revenue is used, instead of total revenue, which can include one-time fees.
Further, only active accounts must be included – i.e. paying customers – rather than those that signed up for a free trial. Each metric must also be normalized to be shown on a per-month basis.
The formula to calculate MRR can also divide the total contract value (TCV) by the length of the contract per customer, wherein the latter is expressed in months.
The MRR of a SaaS or subscription-based company is thereby equal to the sum of the contractual recurring revenue per customer, expected each month.
For instance, suppose a B2B software company's products are offered on a subscription basis and paid annually at a cost of $24,000 per user.
The $24,000 must be divided by 12 to calculate a monthly revenue of $2,000, which would be used in the MRR calculation, as opposed to the annual cost of $24,000.
Next, let’s assume the company has 50 active accounts for the given month.
Upon multiplying the total number of active accounts by the average monthly revenue per user, the resulting MRR is $100,000.
The most common mistake when calculating MRR is forgetting to remove one-time payments.
Unlike subscription-based payments, one-time payments are not recurring and should not be included in the MRR calculation.
Common examples of one-time payments excluded in the calculation of MRR include the following:
MRR measures the recurring revenue brought in each month, whereas ARR measures the recurring revenue generated over the course of a full year.
If MRR is annualized, then the resulting figure is annual recurring revenue (ARR).
ARR is used to estimate revenue for the upcoming year, based on the most recent MRR, assuming that the given month is the most accurate indicator of future performance.
The drawback to ARR is the implicit assumption that there are no changes to your customer base during the course of the year (i.e. no customer churn, upselling, or downgrades).
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The “Net New MRR” is used to adjust the prior month's MRR for new MRR, expansion MRR, and churned MRR, i.e. it is inclusive of both gains and losses.
The net new MRR metric is calculated by taking the new MRR from new customers acquisitions, adding expansion MRR from existing customers, and deducting the lost MRR from churned customers.
Perhaps the most essential KPI for SaaS companies to measure, monthly recurring revenue (MRR) determines a company's long-term viability.
Top performing SaaS companies are usually not only effective at acquiring new customers but can also retain them for a long period of time, i.e. have a low churn rate.
If customer payments are recurring – i.e. consistently occurring and on a contractual basis for an agreed-upon time frame – the company's future performance is more predictable, which reduces its risk.
A higher percentage of recurring revenue enables companies to raise capital more easily and at more favorable terms from institutional venture capital (VC) and growth equity firms.
The business model of SaaS companies is based on monthly subscriptions, in which customers pay a predetermined amount each month, for as long as they remain a customer.
For both B2B and B2C companies, user retention results from reducing the churn rate, i.e. strong growth in new customer acquisitions with limited customer attrition.
We’ll now move on to a modeling exercise, which you can access by filling out the form below.
Suppose we’re projecting the monthly recurring revenue (MRR) of an SaaS company with 1,000 active accounts at the beginning of January 2024.
At the end of each month, the active accounts must issue a payment to the provider at the agreed-upon amount to continue receiving the services; otherwise, their access will be lost.
Therefore, the MRR that we are calculating is the projected MRR as of the end of the month, instead of at the beginning of the month.
Using the monthly churn rate assumption of 2.0% and the new customer acquisition rate of 4.0%, the ending number of active accounts can be calculated for each month.
From January to April 2024 (or Q1-2024), the ending number of active accounts – the number of monetizable customers – increases from 1,020 to 1,082.
The next step is to figure out the average revenue per account (ARPA), which is the monthly billing amount per customer. We’ll assume the monthly billing is $200 per account.
For each month, the monthly recurring revenue is equal to the ending active accounts multiplied by the ARPA.
Our illustrative company's projected end-of-month MRR from January 2024 to April 2024 is shown below.
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