Understanding MRR (Monthly Recurring Revenue)
MRR, also known as Monthly Recurring Revenue, is a predictable income that a company can count on receiving every month. It’s an operational metric primarily used by subscription-based businesses including SaaS (Software as a Service) enterprises. It is also used by product-based companies that have subscription models.
MRR is an important indicator in these businesses because it helps them determine the revenue they expect to receive over upcoming months. Plus, it offers better insight into how much the business is growing in terms of new customers, as well as shedding light on the retention rate of existing customers.
Why is MRR important?
MRR is a snapshot of a company’s health and sustainability, making it one of the most important metrics in recurring revenue businesses.
One of its key benefits is offering predictability. Unlike one-time transactions, where sales can swing dramatically from month to-month, MRR provides a steady stream of revenue. This stability makes it easier to plan for future growth, as businesses have a clear view of their income over time.
Moreover, MRR helps drive strategic decision-making. By breaking down the MRR, businesses can see which products or services are most profitable, and which customer segments are driving growth. This information can inform resource allocation, marketing strategies, and overall business planning. For example, if a business identifies that a certain product is generating the highest MRR, they can allocate more resources to promoting that product.
In addition, MRR is a valuable metric for potential investors. A high MRR indicates healthy, sustained growth and the potential for a strong return on investment. This is a highly attractive characteristic for venture capitalists and angel investors.
Calculation of MRR
The simplest way to calculate MRR is to multiply the total number of paying customers by the average revenue per user (ARPU). For example, if a business has 500 subscribers paying $20 each per month, the MRR would be 500 * $20 = $10,000.
However, not all customers contribute the same amount to the MRR. Thus, many businesses break down their MRR into several categories:
– New MRR: This comes from new customers.
– Expansion MRR: This is the additional revenue from existing customers, either through upsells or cross-sells.
– Churned MRR: This is the lost revenue from customers who have cancelled their subscriptions.
To get the net MRR, businesses add the New MRR and Expansion MRR then subtract the Churned MRR.
In conclusion, MRR is an imperative metric that allows businesses to gain insight into their financial health and potential for growth. It enables them to strategize, make informed decisions, and improve overall performance. Regardless of the size or stage of the business, understanding, calculating, and monitoring MRR can be the key to long-term success.