What is MRR? How do you calculate it?
Monthly Recurring Revenue (MRR), is the most important metric for any subscription business. It’s what makes this business model so great. Once you acquire a new customer who pays a subscription or recurring monthly fee, you have an MRR. These users are worth more than one-off sales because there is no worry about losing them next month (unless we’re talking about “churn” but that’s another topic).
MRR is the measure of predictable and recurring revenue for a subscription business. It will typically exclude one-time fees, but it could include monthly charges like printer ink or other supplies if your company provides those services.
How to calculate MRR SaaS?
Customer-by-customer
The better way to calculate MRR SaaS is not by looking at how much each customer pays, but instead, you should sum up the monthly fee of every single paying customer. For example, if Customer A paid $200month and Customer B paid $100month then your total would be 300$. This calculation makes sense because some customers may have different plans or pay for more than one product in your portfolio.
Monthly recurring revenue is calculated by taking the total of all customers’ monthly fees and dividing it by 12.
Average revenue per account
ARPA is a metric that can be used to calculate MRR. The ARPA calculates the average revenue per account, which should then be multiplied by how many paying customers you have in order to get your monthly recurring revenue. For example, if 10 people are paying $100month each for service and there are no other costs or fees associated with those payments, their ARPA would equal $1k.
MRR is calculated by multiplying ARPA (average revenue per account) with the total number of customers. Click To Tweet
How to calculate MRR growth?
To calculate MRR (Monthly Recurring Revenue) for a subscription business, we need to look at three aspects of the revenue. First is new customers, the second are old ones that have churned out or renewed their subscriptions, and third are those on free trials who may become paying subscribers.
New MRR
New MRR is the amount of new revenue brought in by brand-new customers. So if you had 5 paying $100mo and 2 at $200, your New MRR would be 900.
Expansion MRR
When you think about your monthly revenue, it’s important to keep in mind that there are many different ways of expanding. Upselling is when customers upgrade their plans and cross-selling happens when they buy additional products or services.
Churn MRR
The churn of MRR metric, or recurring revenue, is the money that you lose from customers canceling their subscriptions. For example, if on a given month 2 people cancel $100mo plans and 3 others downgrade to $100mo plan then your churn would be minus 500$. You need to keep in mind though that this figure does not count as customer cancellations but rather it refers only to what was lost by way of monthly billing.
MRR Growth
The final step in calculating your MRR growth is to look at all three aspects of the formula.
To calculate Net New MRR, take the sum of all new and expansion revenue minus churned revenues.
What about annual plans?
In order to measure MRR, divide your yearly revenue by 12. This will give you the monthly average that you can then multiply with a customer’s plan length in months or years.
Importance of Calculating Your MRR
- Determine if your sales and marketing efforts are effective.
- Know your sales’ strengths and opportunities.
- Determine the right budget for the next year to achieve your sales goals.
- Help business owners make sound business decisions based on the result of MRR.
Billing Clients Effectively Improves Your Monthly Recurring Revenue
Billing your clients can help improve the monthly revenue, but you have to make sure that everything is accurate. Click To Tweet
A mistake could lead to a big delay in payment and jeopardize both the customer-business relationship as well as sales performance of staff members.
There are many benefits to using an invoice template. One is that you don’t have to spend time designing the document yourself, which saves a lot of your valuable time.
- Saves Time and Effort: With invoice templates, you’re able to save time and effort by entering all data in a spreadsheet and sending them to clients via email. All you have to do is to key in a small amount of relevant data, and everything gets automatically generated.
- Getting Paid On Time: Because you’ll be able to create and send accurate invoices to your clients using the invoice template, you also get paid on time.
- Reflect Professional Business Reputation: Using an invoice template is a professional way to bill your clients, wherein you can add a description of the charges you’re billing them for following international standards.
- Suitable for Any Business: Whether you’re a small online retail store owner, a freelancer, or offer professional services, using invoice templates makes your life a lot easier since accounting is easier to manage.
Conclusion
You now know how to calculate your monthly recurring revenue. It’s crucial that you do this so you’ll be able to tell if your marketing efforts are working. One thing I’ve learned is that it’s important to be diligent in billing your clients.
