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May 31, 2022

If you’re like most people, you probably have some goals that you want to achieve in your life. But what does MRR mean? And how can the waterfall chart help you hit your targets?

MRR stands for monthly recurring revenue. It’s a metric that is often used by businesses to measure their growth and progress. The reason it’s so important is that it shows how much money a business is bringing in regularly.

The waterfall chart is one tool that can be used to set goals for your MRR. This type of chart visualizes the different stages of revenue generation, from initial contact with a customer all the way through to purchase and retention. By understanding where your business currently falls on the waterfall chart, you can set realistic goals for increasing your MRR.

Let’s dive into what does MRR mean for your business.

What Does MRR Mean?

Monthly recurring revenue (MRR) is a metric that subscription businesses use to track and predict future revenue. MRR measures the average monthly revenue that a business generates from its subscribers.

This metric is important because it can give insights into a company’s growth, customer churn, and lifetime value.

For most businesses, monthly recurring revenue (MRR) is the total of all new subscriptions and upgrades minus the downgrades and cancellations.

Revenue is the lifeblood of every SaaS company, and MRR is the metric used to track it. Though not a GAAP value, MRR is closely watched by investors and analysts as a key indicator of growth.

ARR, or annual recurring revenue, is the total sum of all recurring revenue from subscriptions.

For many businesses, ARR is the total sum of all new customers and upgrades to existing accounts. This metric helps gauge how healthy a business’ revenue is.

Let’s look at an example. 

If 10 customers are paying $150 per month, then MRR would be $1500.

If 7 customers are paying $200 per month, and 3 customers are paying $100 per month, then MRR would be $1700.

If a customer subscribes to a service with a 1-year renewal agreement for $12,000, then ARR would be $12,000.

If a customer subscribes to a service for $10,000 (with no contract), then ARR would be $0.

If a customer subscribes to a service with a monthly renewal agreement for $1,000 per month, then Annual Recurring Revenue would be $1,000 x 12 = $12,000

Why is MRR Important?

Monthly Recurring Revenue is income that a business receives regularly. This differs from “one-off” sales, such as from a client project or a product sale.

MRR is an important metric for software businesses because it provides a clear picture of the growth curve when combined with CPA (Cost Per Acquisition). This is helpful in forecasting and making decisions about future investments and growth strategies.

It is especially important for Software as a Service (SaaS) companies because the marginal cost of servicing customers is usually low, making it a good indicator of financial health.

In subscription “box” services, MRR provides an easy-to-understand measurement of the financial health of the business.

Why Calculate and Optimize MRR?

Understanding your recurring revenue and setting goals based on that value is a great way to gauge the health of your business. You can also calculate your ARR to determine the best way to reach your goals.

MRR is the best way to track the financial health of your SaaS company. It takes into account all of the recurring revenue from your subscription model and projects that same revenue out for a year using ARR.

How to Measure Monthly Recurring Revenue

As a Software as a Service (SaaS) business, it’s important to monitor your monthly recurring revenue (MRR). This KPI will tell you whether or not you’ve found your initial market fit, and if your business is on track.

MRR is the most accurate way to measure your revenues because it provides you with an accurate prediction of your future earnings, so you can track your growth and make adjustments to your company as needed.

Build a Better Product

If you want to keep your customers around and prevent any loss in monthly recurring revenue, then you need to focus on building a better product. Your team should be incentivized every month by that MRR to develop features and experiences that will keep people using your product instead of churning.

Your Sales Team Can Improve MRR

Your sales team can improve MRR by making deals with more qualified leads and emphasizing the quality of leads over quantity.

Common Mistakes When Calculating MRR

Calculating your Monthly Recurring Revenue (MRR) accurately is important. Here are some of the most common errors to avoid when doing so.

1: Including Everything in MRR Calculations

You’re not trying to measure cash flow. You’re trying to measure how quickly and efficiently you’re growing. When calculating monthly recurring revenue (MRR), it is important to divide the subscription value by the intended length of the subscription.

This is because MRR is primarily used as a way to measure momentum, rather than cash flow. By dividing the subscription value by the length of time for which it is valid, we can more accurately gauge the speed and efficiency of growth.

Including everything at once in your MRR calculations can throw off many of your other metrics, including customer churn rate, customer count, and customer lifetime value. To avoid this, be sure to only include monthly recurring revenue when calculating your MRR.

2: Subtracting Transaction Fees and Delinquent Charges From Your MRR

It can be tempting to deduct fees from monthly recurring revenue (MRR) when reporting your numbers. However, this can cause your reported figures to be inaccurate.

While the intention here is good, the phrasing is unfortunate and inaccurate.

Delinquent charges are in a gray area between churn and active, but if you typically recover any failed credit card charges quickly, they shouldn’t have too much of an impact on your MRR.

However, at an end of month (EOMs) calculation, a delinquent payment technically doesn’t exist because you haven’t collected the monthly payment from your customer.

Instead of lumping all unpaid or overdue payments together, you should separate them into their own group. This allows you to more accurately track how much revenue you’re losing every month from declined or canceled cards.

Including transaction costs in your calculations is misleading, as it doesn’t take into account your profit margins.

While it’s impossible to get transaction fees to 0%, you can certainly switch to a different provider, or build your own system, to optimize the cost of your transactions.

A key concept to remember is that any expense which can be optimized should be considered an expense, and not immediately deducted from your MRR. With this logic in mind, you should ideally remove all of your customer acquisition costs (CAC) from your MRR.

By doing so, you can get a more accurate understanding of your company’s financial situation.

3: Including One-Time Payments in Your MRR Calculations

One-time sales or payments aren’t really recurring, so they’re not really “monthly”.

You don’t expect to receive them regularly, which means that including them in your MRR calculations will inflate your revenue expectations and skew your financial model.

4: Including Free Trials in Your Calculations

Perhaps the worst mistake you can make when calculating your customer acquisition cost is to include your free trial users and their projected lifetime revenue before they’ve even converted to being paying customers.

Doing this gives you a list of “new” and “returning” customers who you know have converted. This is because you know that all free trial users will not convert to paying customers.

5: Not Including Discounts in Calculations

This is a huge mistake that a lot of people make. If you give someone a discount on a $100/month plan, and they’re paying $50/month, your MRR isn’t $100/month — it’s only $50/month.

Eventually, if you took the discount away, your top-level MRR would jump by $50/month. So always be sure to include discounts in your calculations

Top Ways to Increase Your Monthly Recurring Revenue

Increasing your MRR isn’t simple, but it’s worth it. Here are some steps you can take to increase your monthly reoccurring income.

Calculate MRR Correctly

Companies of all sizes are making mistakes when it comes to their sales numbers. It’s not just the startups–some companies of that size and scale are making these mistakes.

Additionally, a study of the billing platforms that include these analytics revealed numerous mistakes. Make sure you’re calculating things correctly, or your software may not be functioning properly.

Set Goals with a Waterfall Chart

Tracking your MRR with a waterfall chart shows you how much your month-over-month growth has been.

The chart should plot the growth rate in your MRR from last month, the growth in your MRR for the current month, and your month-over-month goal for MRR growth. This will give you a clear idea of whether you are on track to reach your goals.

It’s important to check in on your waterfall chart each day to ensure you’re making progress toward your monthly goals.

You may not care as much at the beginning of the month, but as it comes to a close, you’ll likely start to push yourself or your sales team harder. This can help lead to a larger customer base, reduced churn, and increased sales revenue.

It’s important to keep track of your monthly recurring revenue and take action accordingly to grow your customer base, reduce churn, and increase sales.

Conclusion

What does MRR mean and how does it work with the waterfall chart? Overall, the waterfall chart is a helpful tool for setting goals for your MRR. By understanding where your business currently falls on the chart, you can set realistic targets that will help you measure and improve your progress. Keep in mind that each stage of the revenue generation process is important, from initial contact with a customer through to purchase and retention.

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