What is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue, aka MRR, is a metric that helps companies track the amount of normalized, predictable revenue they can expect from active accounts on subscription-based contracts each month.
MRR is a useful data point that helps companies assess their financial health and future revenue stability; it’s a common growth metric used by SaaS companies and other businesses with subscription-based revenue models.
You may have also heard of MRR’s close cousin ARR (Annual Recurring Revenue). MRR and ARR are often used interchangeably, and practically speaking there’s not much difference.
MRR is naturally more sensitive to month-to-month changes so it’s often preferred by very early-stage startups that are still fine-tuning their product and operations. There’s no hard and fast rule, but B2C SaaS companies generally track MRR whereas B2B SaaS companies prefer ARR. This is because B2B companies have longer sales contracts and less churn.
How to calculate MRR
Most organizations will track MRR in a tool like Salesforce. You can also use this basic formula to calculate Monthly Recurring Revenue:
MRR = (Average revenue per account that month) x (Number of active accounts for that month)
So, if you have 55 customers who each pay $50 per month, your MRR would be $2,750.
Sometimes, the MRR formula uses average revenue per account (ARPA) or average revenue per user (ARPU). Both metrics require you to divide the total amount of recurring revenue by the total number of users or accounts:
Average Revenue Per Account (ARPA) = Total Recurring Revenue ÷ Total Active Accounts
Average Revenue Per User (ARPU) = Total Recurring Revenue ÷ Total Active Users
These straightforward formulas are somewhat deceiving, though. Calculating MRR can be quite complex and it all starts with how business logic is defined. Here’s an example:
- Most SaaS companies define the Number of active accounts per month as the sum of new subscriptions and upgrades (also referred to as expansions) minus any downgrades (aka contractions) and subscription cancellations.
- But, even amongst SaaS businesses, every company has its own definitions of things like active accounts, upgrade subscriptions, and other metrics. Different companies track different subtypes of MRR, too.
- Even internally, it’s notoriously difficult for organizations to maintain consistency with their metrics definitions.
If you want to learn more about the ins and outs of MRR, jump to the What are the different types of MRR? section.
The importance of metrics definitions
If you want to derive useful insights from tracking MRR, you need to make sure that the business logic behind every metric definition is well-documented. This can be surprisingly difficult in many data tools.
That way, data teams have “final mile visibility” into how data assets are being used in the organization, and business users have the context they need to better understand the data they’re working with.
Track MRR and other important metrics in Google Sheets using AirOps
On its own, MRR doesn’t tell you everything you need to know about your company’s financial performance. That’s why it should always be tracked alongside other metrics.
And while tools like Salesforce are powerful, our experience has shown that business users think it's far more convenient to access and analyze data in operating documents that they already know and love, like Google Sheets ❤️.
Getting high-quality data into an operating document like a GSheet isn’t necessarily easy, though. Especially if it requires you to spend hours manually downloading CSVs from different sources and copying the data into a rickety, VLOOKUP-filled spreadsheet 👎.
There’s a much more efficient way to calculate your team’s MRR (and other important financial metrics): AirOps.
AirOps makes it easy for business teams to track the performance of sales, finance, customer support, and other functions… right inside of the tools they know and love.
Get in touch with our team to learn more and get started!
While MRR is an important metric for organizations to measure, you need a more complete picture if you want to measure your company’s overall performance and effectiveness.
Frequently asked questions about Monthly Recurring Revenue (MRR)
Should my organization track MRR?
Maintaining a steady amount of recurring revenue is a goal that virtually every growth-minded business wants to achieve, but that doesn’t mean Monthly Recurring Revenue is a relevant metric for all organizations.
MRR is most commonly used by SaaS companies and other organizations with subscription-based payment models. This business model is becoming more and more common, especially with the proliferation of technology companies that provide software subscription services.
Why? Well, customer acquisition is expensive. Even marketing to existing customers can be challenging. Subscriptions provide more reliable revenue with reduced acquisition and marketing costs.
SaaS isn’t the only industry where it makes sense to track MRR, though. Businesses that sell essential services and products can also be good use cases for tracking MRR. Amazon’s Subscribe & Save subscription service is a good example of this business model in action.
What’s the difference between MRR and ARR (Annually Recurring Revenue)?
At the risk of being obvious, MRR is a metric that refers to monthly revenue, while ARR refers to annual recurring revenue.
MRR is great for tracking revenue progress and assessing month-over-month performance throughout the year. ARR is an aggregation for the entire year, so look at ARR when thinking about long-term planning (e.g., projecting cash flow, allocating budgets, building product roadmaps).
Why is MRR a helpful metric to measure?
According to a sales director at HubSpot:
“MRR is the most important metric for financial growth. There are other important metrics like growth rate, retention, average sales price, and rep productivity, but at the end of the day, the most important metric is the amount of monthly recurring revenue customers are willing to put on their credit card or pay through an invoice. We judge the performance of our companies, divisions, teams, down to the individual performer based on MRR attainment. It's a foundational metric for examining team and sales rep performance."
Clearly, MRR is a critical growth metric. More specifically, it’s helpful for:
- Performance tracking… and not just for the overall organization, either. MRR can also help individual sales reps assess their performance, and it’s not uncommon for companies to assign MRR quotes to individual reps.
- Motivating your sales team and encouraging them to push harder. If MRR is high, encourage team members to lean into that momentum. If MRR is low, focus on figuring out the root causes and learning how to get those numbers up and to the right again.
- Forecasting future sales. Generally, you can assume that MRR will follow similar trends to past months. This is a very basic way to forecast sales, but it’s not super precise. For more precision and accuracy, use the exponential smoothing method when analyzing historical data.
- Budgeting. MRR is a great metric to look at when you’re preparing budgets. Want to know if you can hire more SDRs or launch a new paid marketing campaign? Start by looking at your MRR.
What are the different types of MRR?
There are several different ways to break down MRR:
- New MRR: Revenue from newly added accounts.
- Expansion MRR: Increase in revenue that comes from existing accounts. A growing Expansion MRR is also often linked to reduced churn rates and increased ARPU (average revenue per user).
- Churn MRR: Revenue lost when accounts cancel. There are a variety of reasons Churn MRR might increase, including lackluster customer support, quality, price, and more. It’s vital to understand the root cause
- Contraction MRR: Revenue lost when users downgrade to a lower subscription tier. (Sometimes, this revenue loss is calculated as Churn MRR, it all depends on your metrics definitions 😉).
- Pause MRR: Revenue from subscriptions that were paused for the timeframe being measured.
Put together, each of these MRR sub-types allows you to calculate the Net New MRR, which is the sum of New MRR and Expansion MRR, minus Churn MRR, Contraction MRR, and Pause MRR. Salesforce has a useful graphic that can help you better visualize the various sub-metrics that make it possible to calculate MRR:
What are the most important considerations when calculating MRR?
Not surprisingly, there are plenty of things to keep in mind when calculating your organization’s MRR.
We’ve already talked about variations of the MRR formula, metrics definitions, and the different types of MRR. It’s also critically important to only count recurring revenue and not total revenue. Total revenue includes one-off fees (like installation fees and setup costs) and other non-recurring payments (such as professional services and consulting fees).
Additionally, be sure that only active accounts are counted in your total number of accounts – free trials and paused subscriptions should always be excluded from MRR. If you define the different types of MRR as described above, you’ll be good to go.
Contracts should also be normalized on a per-month basis. For example, divide quarterly contracts by four, divide semi-annual contracts by six, and divide annual contracts by twelve.
What’s the easiest way to track MRR?
There are a variety of ways to track your company’s MRR and other revenue metrics; the easiest option will depend on your existing technology stack, your business, and your data team/business users.
If you use Stripe, for example, you can find MRR in your billing analytics dashboard.
If Salesforce is your CRM, every deal needs to have the following information if you want to track MRR: Contract start date, Contract end date, and Recurring revenue value. From there, most companies will create dashboards, visualizations, and other reports that include MRR and other important financial performance metrics.
These methods, and most others, all have one major problem: Data is still siloed inside of a tool or dashboard. This might work “okay-ish” for one-off reporting* needs, but it doesn’t help business users use data inside of their daily workflows.
To make data operational, you need to get it inside of core operating documents that people use every single day, like Google Sheets, Notion, and Airtable. AirOps can help you do just that.
How can I improve my organization’s MRR?
To improve revenue and drive growth, consider these strategies:
1. Offer annual contracts
Long-term commitments can give your MRR a solid boost and many companies provide discounts for users who opt into annual contracts. Annual subscriptions also help reduce churn – users are more likely to stick with a product or service they’ve already paid for.
Just be sure to normalize contracts on a per-month basis when calculating MRR! (And make sure you're not giving up more revenue by offering discounts on long-term contracts than would churn with monthly renewals.)
2. Use tiered pricing
Offer 3-4 different pricing options to customers, which will allow them to choose the level that works best for their needs. Bonus: This creates an opportunity for an upsell down the line.
3. Increase your prices
A simple price increase can also have positive effects on your MRR, though it’s important to assess the potential downsides of price increases before making any moves. Short-term revenue gains aren’t always worth increased customer churn.
Here are some things to keep in mind when thinking about a price increase:
- Be sure your quality lives up to the cost (ideally, an increase in price will come with an increase in quality).
- Existing customers might feel caught off guard by a price increase. Communicate with them early on. One popular approach is to honor old pricing for a set period of time. Always use price increases as an opportunity to communicate the value of your product, especially recent improvements and new features.
- Approach any potential price increases with a data-driven mindset. Price sensitivity data and A/B testing are two powerful tools you can use to test the effectiveness of any planned price increases.
4. Assess your customer retention strategies
New subscriptions are awesome but don’t neglect your existing customer base. If your Churn MRR is high, that’s a sure sign customer retention needs some work.
Customer retention is equal parts art and science (aka data-driven testing), but here are some strategies to consider:
- Develop a comprehensive customer onboarding experience that sets users up for success. Customer education programs are also a good fit for some companies.
- Implement a customer feedback loop (CSAT and NPS surveys are two common ways to collect feedback)
- Work on improving your customer success team’s performance in order to increase upsells/expansions.
- Before someone cancels, be sure to ask them why they're canceling. This allows you to provide a relevant retention offer and also helps you improve your product.
- If the reason for cancellation is price, consider offering an incentive to stay. When possible, the best practice is to provide a downgrade option to a lower tier instead of offering discounts. This approach helps protect revenue and prevents customers from gaming the system.
- Get new customers. At the risk of stating the obvious, customer acquisition is a huge driver of MRR growth for any company. Adding a referral program can help you stretch your marketing budget further and acquire new customers faster.
Recommended resources related to MRR