What is MRR and how should you calculate it?
This is the third installment of our 10 part series on SaaS metrics, KPIs and benchmarks. You can access the entire series in a single pdf file here:
Monthly Recurring Revenue (MRR)
This is the single most important baseline metric. MRR coupled with Churn Rate is possibly the most tracked metric set. But, growing at any cost may be fatal, You need to keep your Customer Acquisition Cost (CAC) in mind as well.
In a perpetual business model growth in bookings is the benchmark, for a SaaS business using bookings in isolation is misleading because of variable terms, upgrades, downgrades, and renewals. By normalizing the revenue motions into a monthly time frame you provide your stakeholders with a more accurate view of your business momentum.
The recurring revenue model should create stability in your business. Over time, as you accumulate recurring revenue, short-term bookings have less impact on MRR. Your monthly numbers (both revenue and costs) become more a function of your long-term historical bookings. You should be able to avoid the feast or famine, deal by deal behaviours common in the perpetual software model.
With the recurring model, your job is to build a flawless customer operations model based upon benchmarked KPIs and metrics. You know you have customers tomorrow, therefore, investing in customer support and on-going customer success can be done with a high degree of confidence.
With the recurring model, your job is to build a flawless customer operations model based upon benchmarked KPIs and metrics.
Using MRR and/or Annual Recurring Revenue (ARR) as an input enables you to build a more reliable and financial forecast and plan.
Once you have several months of MRR historical data you can understand if you are gaining traction or stalling. You also can begin to model your forward-looking scenarios with a higher degree of certainty.
You can use MRR as a key element of evaluating your sales strategies and results.
You can track performance. How large are the accounts your sales team is managing? Are they struggling to hit their quotas? What are the similarities and differences between account bases in different territories? Were their sales tactics used in one territory that impacted results?
Big picture forecasting can be performed, you should be able to plan for both short and long term growth.
You can use MRR analysis and a key data point in budgeting. Based on current and past results how many sales team members should be added? Should you hit the gas or brakes?
Change in MRR is constant. New customers are acquired, existing customers churn off, current customers expand or contract their subscriptions creating a net difference in your MRR Growth Rate. A big red flag in a SaaS business is negative growth. On average healthy growth is 3x+ more customers acquired than lost during a given time period. If you aren't growing your logos significantly you lose momentum.
So, to summarize this section when you are looking at MRR you are evaluating your growth.
- If you use Net New MRR (your MRR from new customers) as a key metric, you are optimizing for growth and you should be watching your MRR Churn and CAC to evaluate your success.
- If you use Expansion MRR (your increased MRR from existing customers) as a key metric, you are optimizing for growth and you should be watching your MRR Churn to evaluate your success.
- You can also track your Bookings (Total amount of contracts signed) and watch your Refunds as an evaluation metric.
MRR growth at all cost may take too much time and effort from retention or CAC, resulting in a higher MRR number, but tons of churn or much lower profitability it's all a tradeoff and your focus will likely change over time.
Calculating MRR
To calculate MRR, take all of your current customers and align them with their subscription value. If you have customers on term agreements, take the Total Contract Value (TCV) and divide it by the Term for each of these customers to get the MRR value. Finally, add up all of the subscription values to determine your current MRR. Remember not to include any one-time charges or non-recurring revenue in this sum.
MRR = (Average Monthly Subscription Value / Customer) x (Number of Customers)
How to Calculate MRR
- Calculate the total revenue generated by all customers during the month
- Calculate the average monthly amount paid by all customers
- Multiply the average amount paid by the total number of customers
MRR Example Calculation
SaaSly Corp., a platform for SaaS Founders, currently has 5,000 customers on three different plans. Half of its customers (2,500) are on the $49 per month entry paid plan with month to month billing, with 2,000 customers on their Pro plan at $5,999 per year and the remaining 500 clients are on the Enterprise plan at $11,999 per year.
To calculate MRR, SaaSly would take the 2,500 customers on the monthly plan and add the 2,500 customers on annual plans (dividing the TCV by 12):
(2,500 x $49) + (2,000 x $5,999/12) + (500 x $11,999/12) = $1,622,291.60
If the following month they grew each cohort 5% and lost no customers, the MRR would be $1,703,406.18.
$1,622,291.60 + (125 x $49) + (100 x $5,999/12) + (25 x $11,999/12) = $1,703,406.18
This is a 5% MoM increase in MRR. As we will see later in this document looking at MRR growth without considering Churn may lead to a false conclusion. However, one clear takeaway is that focusing on converting and upselling Pro and Enterprise plans can move the needle for SaaSly significantly.
It is important to remember that SaaSly’s total revenue for each of these months may have differed significantly from the example above if they had any non-recurring payments such as installation, onboarding, training or consulting fees or they had one time charges for usage or data overages. With MRR you are not performing a cash flow analysis you are evaluating your core topline business growth in this case 6.5% month over month.
It’s important to note that SaaS tools like Smithers track all of the input data and looks at recurring and non-recurring revenue items separately and can make this available to users in real-time.
Want to read the entire series now?
Managing a SaaS business in a user-driven world
Building a SaaS business relies on knowing your numbers. We now live in a subscription-based world. It is end-user driven.
You need to listen to your customers by identifying what is of value to them and understanding what they are telling you through their actions (or lack of action) and then act on those insights — in real-time.
If you can build a profitable customer relationship, you will build a successful business. Unlike the enterprise software business, your goal is not a single or small set of transactions but rather building a relationship for life.
You can manually build a spreadsheet-based control book but that is complicated, error-prone and takes many hours of executive and staff time to maintain. With Smithers link to your key systems of record once and have the critical business performance data you need at your fingertips you and your team can access your data anywhere that you work, live or play, 7/24.
Smithers amalgamates your payment data, financial data and marketing analytics into a single cohesive dataset that allows you to visualize your key performance metrics in real-time.
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