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April 15, 2022

If you’re looking to calculate your monthly recurring revenue, look no further! This guide will show you how to calculate MRR for your business quickly and easily.

To calculate MRR, simply take your total recurring revenue for the month and divide it by the number of customers you have. For example, if you have 100 customers and your total recurring revenue for the month is $10,000, then your MRR would be $100.

MRR is the most important performance metric for a subscription company like your SaaS business. it isn’t always easy to track, predict, and determine your MRR.

Today I will be taking a closer look at how to calculate MRR/ARR correctly.

To caclulate your MRR, simply take your total recurring revenue for the month and divide it by the number of customers you have. For example, if you have 100 customers and your total recurring revenue for the month is $10,000, then your MRR would be $100.

The Importance and Value of MRR

Most B2B SaaS companies work on a monthly subscription model. Customers pay a fixed monthly fee and, as long as they remain customers, you have a predictable source of revenue. This revenue is the subscription revenue.

This payment is recurring, so it’s relatively easy to forecast and track revenue. MRR is where it comes in. we can calculate the monthly recurring revenue (or monthly revenue) generated by our customers.

If we have a good understanding of customer acquisition and churn rate, we can use that information to extrapolate to future MRR.

How to calculate MRR

The formula for MRR is simple: Take the monthly recurring revenue from each month (period 1) and add it up to get your MRR number.

MRR t = recurring revenue

In the following example, we have $200 per month in subscription and 2 customers in January. we gain another customer in February and our MRR goes up.

January: 200 + 200 = 400 MRR

February: 200 + 200 +200 = $600 MRR

March: 200 + 200 + 202 = $600 MRR

January: 200 + 200 = 400 MRR

February: 200 + 200 +200 = $600 MRR

March: 200 + 200 + 202 = $600 MRR

MRR and ARR are often used interchangeably. These metrics are synonymous with fine wine and annualized fine wines.

ARR is sometimes called Annual recurring revenue or Annualized Run Rate, but the core calculation remains the same.

MRR is the recurring revenue generated each month, while ARR is the recurring income you’d generate over the course a year. ARR is used for forecasting purposes to predict annual revenue for the next 12 months, assuming no changes to your customer base.

the formula is therefore very straightforward:

ARR = MRR ** 12

Do not be confused if you are unsure when to use MRR instead of ARR. ARR is usually the reserve for enterprise SaaS companies that deal primarily with annual contracts. MRR is better If monthly subscriptions are the majority of your recurring revenues.

“…most enterprise SaaS businesses should use an annual recurring income (ARR) and not monthly recurring revenues (MRR) because most enterprise companies do annual, not monthly contracts …” Dave Kellog

Use this simple MRR formula

To calculate MRR, simply take your Average Revenue Per User (ARPU) and multiply it by the total users for a given month. Here’s how you calculate MRR:

Monthly ARPU x Monthly Monthly Users = Monthly Recurring Income

The 4 steps below provide a more detailed breakdown.

1. Align your data

Take all the customers that are still active in a given month. Create a spreadsheet with a column to indicate their account ID or other unique identifier. Next, add their subscription value. Take multi-month subscriptions and divide the contract value by the number.

2. Add MRR

Next, add the subscription column. This will give you the total monthly recurring revenue for that month.

3. Breakdown by cohort

While the top-level information is important, you will also need to break it down by type of pricing plan, cohorts, and so forth. Follow the same steps as above but only include data from segments you are interested in.

4. Calculate MRR growth

Once you have a good idea of your MRR, you will want to see your MRR growth. This can be done by breaking down the sections into groups like “New MRR”, MRR from Add-ons, or “Churn MRR”. Calculate your total growth MRR, do the following calculation: (New MRR + Churn MRR = growth RRR).

These steps may seem a bit abstract to you right now, so let me show you a concrete example. Your total MRR is (10 x $10 + (10 x $15) = $250.

This can get more complicated as you dig deeper into your key metrics. You will need to measure your expansion MRR (upgrades), customer turnover, downgrades and new. All this information in one graph, such as the one below.

The main point is that your monthly recurring revenue, especially at the top, is purely based on your subscription value and the number of customers. All of this commentary refers to months that have already occurred. You’ll need to keep track of your MRR every day when you cook with gas.

This becomes more important when you have to care about MRR breakdown ( MRR churn upgrades, downgrades and new, existing). That commentary will be saved for another post.

How to get MRR right

Although the MRR formula is very simple, many SaaS companies include or exclude unnecessary data sources and confuse their MRR calculations.

You should include these things in your MRR calculation

  • All recurring revenue generated by customers. This includes any monthly subscription fees and any additional regular charges for additional users, seats, or other services.
  • Upgrades or downgrades. It is important to track any upselling success and any customers who downgrade to a cheaper package.
  • All recurring revenue has been lost. this reduction in MRR must be taken into account.
  • Discounts. If your customer has a $200/month package but pays a $150 monthly fee, their MRR contribution will be $150 and not $200.

Things to avoid:

  • Recurring expenses. MRR doesn’t measure profitability. We are trying to gauge trends in recurring revenues generation. adding costs to this will only confuse the matter.
  • Bookings. This is a common error and deserves to be explored more deeply.

What is MRR not good for?

It is worth noting that MRR in the early days can be a misleading indicator of growth. While your MoM growth will appear very strong as you win early clients and contracts, this growth is unlikely to last long. As you can see, growth rates slow down as ARR increases.

What metrics are most important to investors in relation to MRR?

Investors monitor other metrics in addition to MRR to get a complete picture of a company’s success and growth.

Churn rate: Also known by customer churn or rate of attrition, this is the number of customers who stop doing business with you company. It is the percentage of subscribers who cancel their subscriptions within a specified time frame. This is a key metric for investors to assess the product’s stickiness.

CAC is Customer Acquisition cost. This is the cost to win a customer to buy a product/service. This is often difficult to measure because you have to take averages and analyze it over a reasonable period of time.

LTV/CAC The customer’s lifetime value to customer acquisition cost (LTV:CAC ratio) measures the relationship between that customer’s lifetime value and the cost of acquiring it. LTV is divided by CAC to measure the metric. It is a sign of customer profitability and sales and marketing efficiency.

Investors should consider these metrics when assessing the future potential MRR growth.

Why calculate and optimize MRR?

If your business is based on a recurring revenue model, then you can calculate metrics such as ARR and MRR to help you understand the health of your business and set goals for revenue and growth in the future. MRR is a good metric to use to predict success.

After determining the product-market fit by using user testing and activity, MRR can be used as a compass metric to track the growth of a SaaS company. This is because MRR, which is the most direct measure of your revenue in SaaS businesses, shows how your revenue is growing or declining over time.

MRR will also help to build a better product by being incentivized not to churn MRR. This will lead to the improved products over time.

What is Net MRR Growth, you ask?

It is simply the month-over-month increase in MRR. You will lose customers and gain customers every month. This metric will measure the overall net growth.

(PS.) Existing MRR + (+) New Business + (+) Reactivation + (+) Expansion – (PS. Churn – + (+) Contraction = (PS. Net MRR

E.g. (PS20,000), Existing MMR +(PS2,000) New Business +(PS200) Reactivation + (+PS500) Churn + (PS200). Contraction = PSD21,500 Net MRR

You will need at most two months of data for the Net MRR growth. The March Net MRR for March is PS21,500. For this example, the February Net MRR will be PS12,000.

(PS.) Net MRR March – (PS.) Net RRR February / (PS.) Net MRR Feb x 100 = (%) MRR Rate Growth Rate

(PS21,500-PS12,000)/ (PS12,000+) x 100 = 79%

Conclusion

There is so much more to discuss and explore about MRR and other metrics related to subscription businesses. You now know how to calculate MRR. We’ll keep you updated with more information over the coming weeks and months, but remember that this is a game where SaaS momentum is the main focus and subscription is the ultimate focus.

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