Keeping an eye on revenue is important to any business, but depending on your business model, your interest will be on specific types of revenue. For example, if your business is subscription based, you need to monitor recurring revenue metrics like Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR). The monthly fees that your customers pay for your products or services are a predictable source of income used to calculate MRR. You can then use this metric to monitor revenue growth.
In this post, you will learn what monthly recurring revenue is and how you can calculate it. You will also learn about why this metric is important, as well as the different types of MRR you need to consider in order to calculate the total MRR. Finally, you will learn about the MRR rate and the kind of values you should be aiming to achieve. To learn more about ARR, check out this post on Annual Recurring Revenue (ARR) And How to Calculate It.
What is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue (MMR) refers to a business’ predictable subscription revenue generated in one month by all active subscriptions. Annual subscriptions should be normalized to monthly amounts, and one-time fees should not be included in the calculation as they are not recurring revenue.
Why is MRR Important?
MRR is a good indicator of your business's revenue potential. Keeping accurate track of your MRR will help you monitor revenue growth and make informed decisions on how to grow your business. MRR allows you to monitor performance and improve budgeting and forecasting.
How to Calculate MRR?
MRR can be calculated in different ways. For instance, you can find recurring revenue for each one of your customers and add them all up. You can also calculate MRR by multiplying the number of monthly subscribers by the average revenue per user.
MRR = number of subscribers * average revenue per user
In order to accurately account for all subscriptions, they will have to be normalized to their monthly values. For example, an annual $1800 subscription works out to twelve $150 monthly payments, while a $50 weekly subscription works out to $200/month. In other words, the calculation will depend on the length and billing frequency of your subscriptions.
However, when your business starts growing, it’s important to break it down into different types of MRR so you can see where you’re making or losing money. You can then use these to calculate Net MRR.
Net MRR = New MRR + Expansion MRR + Reactivation MRR - Churn MRR - Contraction MRR
In the next section, you have descriptions and examples of how to calculate each type of MRR. Analyzing the different components contributing to your MRR will help you evaluate different aspects of your subscription business and calculate Net MRR.
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READ MOREWhat are the Different Types of MRR?
To track your MRR and calculate it accurately, you need to consider different factors. Your Net MRR will depend on existing customers and upgrades, new customers, lost customers, and downgrades. Below, you have descriptions and examples of how to calculate different types of MRR metrics.
New MRR
New MRR considers only the revenue generated by new customers during the month in question. For example, if you had ten new subscriptions this month, each paying $200 a month, your New MRR would be $200 * 10 = $2000.
Expansion MRR
Expansion or Upgrade MRR considers upgrades to subscriptions or add-ons purchased by existing customers. For instance, imagine one of your existing customers has upgraded from a $200/month plan to one that costs $300. The customer also purchases an add-on for $20/month.
Your Expansion MRR would be $300 - $200 + $20 = $120.
Contraction MRR
Contraction MRR considers revenue lost due to downgrades to existing subscriptions. For example, two of your customers may decide to move from a $300/month to one that costs $200/month.
Your Contraction MRR would be $300 * 2 - $200 * 2 = $200.
Churn MRR
Churn MRR considers revenue lost due to canceled subscriptions. For instance, if three customers canceled their $300/month subscription, your Churn MRR would be $300 * 2 = $600.
Reactivation MRR
Reactivación MRR considers the revenue made from previously churned customers who reactivate their subscriptions. For example, if two previous customers reactivate their $200/month subscription, your Reactivation MRR would be $200 * 2 = $400.
Let’s calculate Net MRR based on the examples from above:
Net MRR = New MRR + Expansion MRR + Reactivation MRR - Churn MRR - Contraction MRR
Ner MRR = $2000 + $120 + $400 - $200 - $600 = $1720
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What is a Good MRR rate?
An MRR growth rate of 10% - 20% is generally considered good. There are many ways to increase your Net MRR by analyzing the components involved. You can get valuable insights into your strengths and weaknesses if you also track the different MRR components by product and subscription type.
In other words, knowing that your MRR has grown by 10% is useful, but knowing how this breaks down might be even more important. Where does this growth come from? Are any specific products or services responsible for this? The fact that your Net MRR is positive doesn’t mean you didn’t lose money on some products or services. A detailed breakdown of your MRR will help you identify areas that need improvement and possibilities for generating new revenue.
However, thoroughly analyzing your MRR requires analytical tools and good data management. Google Sheets or Microsoft Excel can be used to track and analyze the relevant metrics, but manually managing and synchronizing data across multiple files can be very time-consuming and prone to errors. Using Layer, you can synchronize your data, manage access levels, automate calculations and custom reports, and automatically share them with interested parties.
Conclusion
As you have seen, MRR is an important metric for any subscription-based business. Keeping track of recurring revenue monthly allows you to make informed budgeting and forecasting decisions. It’s important to break down your monthly recurring revenue into its different components. You can identify weaknesses and strengths by analyzing your numbers for new and churned subscriptions, as well as upgrades and downgrades.
You now know what MRR is, as well as the different types or components that contribute to its value. You also know why it’s important and how monitoring it can help your subscription business. Finally, you know how to calculate your MRR and your MRR rate. To learn more about Annual Recurring Revenue and the different recurring revenue models available, read this article on Annual Recurring Revenue (ARR) And How to Calculate It.