As a SaaS business owner, you keep a close eye on your Monthly Recurring Revenue, known as MRR. This important metric is the total that your business generates each month as a result of your ongoing, active subscriptions.
Not only is MRR the lifeblood of any software company, but it also plays a major role in the way people purchase SaaS products. As such, it’s more than just another metric to track.
Your total MRR influences the profitability of any SaaS company. It also affects key investments into both your company’s product development and market strategies. Today, we’re covering what tracking MRR includes, as well as tips to scale yours successfully.
What is Monthly Recurring Revenue (MRR)?
In the SaaS business model, monthly recurring revenue (MRR) is a measure of your predictable, recurring revenue. It helps organize all of your disparate pricing plans and billing schedules into a consistent number. This way, you can easily track how much money your business makes each month.
Note that your monthly revenue doesn’t account for one-time sales or other upfront fees, such as customizations or onboarding. It refers to the routine subscription payments that come in each month.
Likewise, it also doesn’t factor in any costs, such as marketing and sales teams, advertising, operations, and support.
Simple method to calculate Monthly Recurring Revenue:
- Start with the total revenue collected in a given month.
- Multiply that figure by the total number of accounts for that month.
- Example: If you have 20 customers paying you an average of $100 per month, your MRR would be $2,000.
This important metric is vital because it allows SaaS leaders to set an accurate budget and forecast future cash flows. It also provides a clear picture of how your SaaS business is performing.
MRR vs. Amortization
If your SaaS business only provides monthly subscriptions, then MRR may be the primary revenue metric that you need to track. Your customers will pay a fixed monthly fee on a recurring, month-by-month basis. You can depend on that revenue as long as their subscription remains active.
The challenge comes when clients want to prepay on an annual basis, rather than month-by-month. In that case, you’ll need to handle that payment a little differently, rather than lumping it into your SaaS MRR calculations.
If you can multiply or divide by 12, you can understand amortization. The significance of annual recurring revenue (or annual run rate) is the longevity of each customer and revenue recognition.
More about ARR and bookings
Annual payments will instead count toward your “bookings” figure. This measures every time a client “books” a product or service that your company provides. Bookings are forward-looking and indicate the total dollar value of a signed contract over a given period of time. This metric does not distinguish between upfront payments and recurring ones.
When you want to include annual bookings within your MRR, you’ll need to amortize the incoming revenue. In short, this means spreading a one-time annual payment out on a monthly basis or dividing it by 12.
Let’s take a look at one example.
You have four total clients. Two clients have a recurring monthly charge of $100 while the other two pay for a whole year in advance, at $1500 annually. The MRR calculations for each month would appear as follows:
Month 1: $100 + $100 + ($1500/12) + ($1500/12) = $100 + $100 + $125 + $125 = $450 MRR
Related SaaS metrics
MRR is simply one way to measure your SaaS business’ health and profitability. However, it isn’t the only one. A few others to keep an eye on include:
- Customer Lifetime Value (CLV): The amount of revenue your business will receive from a customer during their time with your company
- Customer Acquisition Cost (CAC): The total sales and marketing expenses it takes to acquire one customer
- Churn Rate: The rate at which active customers cancel their recurring revenue subscriptions with your SaaS company
- Average Revenue Per User (ARPU): The amount of revenue a single user generates for your company
Examining your customer acquisition costs and cohorts (segments) of customers that leave lets you make more informed business decisions. Are you attracting unfit customers? Or is your service no longer meeting the needs of a sizable number of customers?
Each of these SaaS metrics can provide insight into the viability of SaaS companies. It’s critical that SaaS founders measure the profitability of new and existing customers, as well as the costs incurred when they exit.
Ways to calculate MRR
You can calculate MRR by simply multiplying your total number of active monthly customers by your average billed amount. Yet, things are rarely that cut and dry.
Within that greater calculation, there are a few different variations to note. These include:
- Expansion MRR
- Contraction MRR
- New MRR (cohorts)
- Churn MRR
Let’s break these SaaS MRR components down in greater detail. We’ve also included an “Explain Like I’m Five” (ELI5) summary for each.
Expansion MRR measures the revenue impact that occurs when existing customers expand or upgrade their subscriptions. To calculate this growth rate, add together all the additional revenue that occurred during that month.
ELI5: Expansion MRR consists of customer upgrades, upsells, and account growth (like more users).
Contraction MRR works in the opposite manner of expansion MRR. It measures the revenue that SaaS companies lose when an existing customer downgrades their current subscription.
This might occur when they remove previous add-ons, switch to a lower-priced plan, or utilize a discount. In addition, it also measures the lost revenue when a customer cancels their SaaS subscription altogether. Also, retention credits are accounted for here.
To calculate Contraction MRR, add together the total amount of monthly revenue lost from downgrades plus the monthly revenue lost from cancellations.
ELI5: Contraction MRR consists of bad things to the business like cancellations, downgrades, or other losses of revenue on a recurring basis.
In the SaaS realm, “cohort” is the term used to describe a group of new customers acquired over a given timeframe, such as a month. New MRR measures how much of your monthly revenue is generated strictly by new customers.
As plans and pricing are adjusted, you might track the type of MRR differently depending on the account start date.
This shows you the value that your cohorts are bringing in, as well as what you can expect them to bring in the future. You’ll calculate New MRR the same way as MRR, but exclude existing customers.
ELI5: New SaaS MRR consists of new accounts paying a monthly fee that did not exist before.
The MRR churn measures the amount of monthly revenue your SaaS business is losing each month due to cancellations.
When calculated against baseline MRR, it’s called your Churn MRR Rate. This number now reveals the number of cancellations you’ve had in a given time frame, but also the value of those lost customers.
In short, this tells company leaders whether you have a retention issue or an acquisition issue within the business. Once you solve for high churn, you can invest in a reactivation “win back” campaign.
ELI5: Churn MRR is the total amount of cancellations that occurred within a month. For instance, if you had 10 customers cancel and they paid $100/month, you would have $1,000 Churn MRR.
Measuring one-time revenue
Measuring the impact of recurring monthly revenue is one thing. Yet, what about revenue that falls outside of these parameters, such as money earned through one-time charges, including setup and onboarding fees?
One-time revenue is typically excluded from SaaS MRR calculations for the sole reason that it isn’t recurring.
Beware, though. While one-time revenue allows you to fully onboard new accounts and help them stay loyal, these users often need more operational support beyond the first few months. A difficult product and uncommitted users result in a high churn risk. Strike a balance to make your product easy enough to set up without needing manual, expert setup.
Examples of companies with a healthy SaaS MRR
As you’re setting up your SaaS metrics, it’s helpful to take a page from the playbook of other heavy-hitters who have paved the path before you.
This includes two of the most prolific e-commerce brands, Adobe and Spotify, as well as some promising SaaS startups. Let’s review how their month-over-month growth works and what you can learn from it.
Adobe: One of the Largest Pivots to the Cloud
In 2013, Adobe transitioned from a box-licensed software model to a cloud-based subscription model, charged monthly. While programs like Photoshop were generating an impressive $999 per purchase, it was a single-time payment for a perpetual license. Once the software was in the users’ hands, Adobe wasn’t able to earn any more revenue unless they could upsell them on an upgraded version.
To amplify earnings and appeal to new customers, Adobe changed its pricing model. It began offering Photoshop at $9.99, which is 100 times lower than the cost of a perpetual license.
That switch also resulted in the launch of Adobe Creative Cloud, a set of apps that gives subscribers access to tools designed for a variety of uses, from graphic design to photography.
A subscription-based MRR model allows Adobe to acquire more customers, as well as increase the CLV of each new subscriber. While revenue dipped by 8% after the transition in 2013 and remained flat the following year, Adobe is now recognized as a leader in the global subscription economy, with a market cap growth rate of more than 87% since 2012, reaching more than $307 billion today.
Shopify: Solving E-Commerce for 2 Million Merchants
Shopify is a multi-faceted e-commerce platform that allows its entire customer base to create full-scale online businesses. It includes tools that aid with site development, hosting, and payment processing, among others.
Before switching over to a SaaS MRR model in 2007, the platform took a fixed percentage of each user’s e-commerce sales. This model discouraged high-volume sellers from using Shopify, as the fees increased along with their profits.
Today, Shopify charges users a monthly fee to use its service.
Shopify continues to follow the SaaS MRR model, charging monthly fees as well as minimal transaction fees that comprise a small percentage of merchant sales. Through this approach, they’re able to incentivize startups without negatively affecting revenue.
As of September 2021, Shopify’s MRR was $98.8 million. This is a year-over-year increase of 33%, up from $74.4 million in September 2020. In the past year, more merchants joined the program, and there were more retail locations using the program’s POS Pro services.
At the same time, Shopify shop owners are seeing equally notable results. Third-party add-on provider WhatsApp Support revealed how his micro-SaaS reached 20,000 users and $25,000 MRR by optimizing support, increasing product value, and dropping its monthly price from $30 to $10.
With a marketplace of add-ons, Shopify was able to split the burden for product innovation with independent partners as well as reap the benefits of a lower churn rate.
Additional SaaS Startups
The world of SaaS is filled with ambitious startups that managed to find success following a subscription-based business model. A few of the most recent examples include:
- ClassPass (acquired by Mindbody)
- Shortcut (previously Clubhouse.io)
These startups all rely on some version of SaaS MRR (monthly recurring revenue). Moreover, they’ve all followed an impressive MRR growth rate and continue to trend upward.
Strategies for SaaS providers to increase MRR
Naturally, SaaS leaders want their MRR to be as high as possible. While a change might not happen overnight, it helps to know which adjustments are most effective. Let’s review the strategies that can make a difference.
1) Lower customer churn
Churn is the biggest threat to your monthly revenue. Customers that churn sabotage your MRR. As they leave SaaS companies, they take with them all of their subscriptions. Often, they’ll also convince others to do the same.
There are a few different ways you can minimize your number of service cancellations. They include:
- Reaching out to customers proactively
- Inviting existing and new customers to engage with your services daily
- Conducting surveys to determine exit causes
Downgrades can have a similar negative effect on your MRR. If customers are switching to lower-priced plans, then reach out to understand their motives. The solution may be to add higher-value features to your current subscription plans. Consider offering a modest 5-10% discount for those that upgrade to annual pricing.
Or, you can invest more deeply in marketing, reactivation, and customer service initiatives.
2) Increase revenue
As you lower your cancellations, try to also increase your overall revenue. Look for areas where you’ve purposefully or inadvertently underpriced your goods or services, and make necessary adjustments.
Before you begin, it helps to have a clear picture of where your company’s revenue stands. The image below depicts a SaaS sales funding strategy, including MRR.
To a degree, you can also upsell, cross-sell, and raise pricing where logical. This might mean charging a little more for new accounts, shortening free trials, or investing in digital marketing campaigns, such as pay-per-click (PPC) and email marketing.
If there are any inefficiencies in your SaaS products, then addressing those can also create an uptick in revenue.
Technology leaders in SaaS need to make it super simple for users to get value, transact, and pay for their services. If anything impedes this process, the churn rate is likely to increase and revenue will head in the opposite direction.
3) Acquire best-fit customers
Sometimes, monthly recurring revenue suffers because your current subscribers simply aren’t a great fit for your platform. When this happens, churn rates and cancellations are consistently high. It can also be difficult to convince those users to pay additional fees for extra features.
Ultimately, what you’re trying to achieve is called product-market-fit. Product market fit is achieved when the following occurs:
- You identify the right target customers
- Those customers use your SaaS service to its fullest
- Users become advocates and tell others about your brand
- Your MRR becomes high enough to increase your growth rate
Before you can initiate this cycle, you’ll need to make sure your subscription model appeals to the right people. Best-fit customers are those whose needs align perfectly with a product’s capabilities.
You can identify your top buyers by analyzing demographic trends. You can also send surveys or post social media questionnaires. Once you know who’s buying your SaaS services and why, you can create solutions that align with their needs and wants.
4) Make it easy for existing customers to spend more
You can also consider expansion tactics that can help you make the most of your current MRR setup. This includes understanding what your customers are buying and looking for ways to upsell or cross-sell them.
Some of the most effective expansion tactics include:
- Adding extra product features only accessible via upgrades
- Offering customized plans to specific high-level clients
- Offering yearly prepayment plans at a discount
- Upsell by suggesting more expensive platforms, plans, and services
Even e-commerce giants like Amazon have used cross-selling to increase customer spending. When you sell non-core products (think product training or premium support services) in addition to your SaaS platform, you can create a comprehensive solution that drives customer loyalty and morale.
As an example, Amazon Web Services played the long game. They offer a plethora of microservices that add up to a highly profitable ARR. In essence, these are packaged as pay-as-you-go services that result in sustainable SaaS MRR from its customer base.
Common questions about SaaS MRR
While we’ve tried to make this guide as comprehensive as possible, we understand that you may have some lingering questions. Here are four of the most popular questions about SaaS MRR.
What metrics are is included in MRR?
Your MRR rate includes all of the recurring revenue that your business earns from active SaaS subscriptions each month. In addition to those fixed-price fees, MRR also covers:
– Recurring charges related to discounts
– Recurring system add-ons (e.g. extra seats or users)
– Upgrades and downgrades
– Lost recurring revenue (churn)
Note that MRR does not typically include one-time charges, recurring costs, or non-adjusted bookings.
What are examples of SaaS products with MRR?
There are two main types of SaaS products that operate on an MRR basis. These include monthly subscription products and term-based or contract subscription products.
Some of the most common types of monthly, MRR-based SaaS products include those that facilitate:
E-commerce: Shopify, eBay, Amazon, Stripe, Square
Web hosting: Wix, Bluehost, WP Engine, Pagely
Communication platforms: RingCentral, Dialpad, Nextiva, Zoom
Accounting: Quickbooks, Turbotax, Wave, Novo
Human resources: Gusto, Workday, Rippling, ADP
What is the difference between MRR and ARR?
Another SaaS metric to consider is Annual Recurring Revenue (ARR) to benchmark the scale of the business. This flattens the effect of outliers of a given month’s revenue.
The main difference between MRR and ARR lies in when you perform the calculation. You’ll calculate your MRR on a monthly basis, and your ARR on an annual or quarterly one.
As such, ARR takes a high-level look at your company’s finances, while MRR is more granular in nature. While it can be a little more tricky to navigate than ARR, it’s a critical metric to track within your company. This way, everyone knows how the company is doing today compared to this point last month.
When a SaaS business offers annual contracts, the net new MRR is more predictable revenue month to month. With ARR, SaaS companies can more easily calculate a customer’s lifetime value (LTV). Successful firms aim for a 3:1 LTV:CAC ratio to determine if they want to invest more in marketing and sales teams. Too high a ratio (>5), you could be leaving revenue on the table. Too low, and you’ll hurt your cash flow.
Investors are most interested in your overall run rate, or ARR. These numbers and patterns are easiest to report on as you expand your customer base.
What is a good MRR?
It can be difficult to benchmark certain SaaS metrics, including MRR. This is mainly because performance will vary based on a variety of factors, including:
– Target market
– Customer demographics
– Business stage
In a perfect world, you’d have zero churn rate and an increasingly high MRR. Still, a solid churn rate sits at around 5% to 7%, according to industry experts.
Focus on loyalty to achieve optimal SaaS growth
The more you know about your SaaS business, the quicker you take action to improve revenue, trim costs, and improve team member performance.
Now that we’ve covered all the aspects of SaaS MRR, are you ready to apply this calculation to your own operations? As you do, look for ways to make your SaaS product as dynamic and feature-rich as possible.
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