How To Calculate Monthly Revenue For SaaS Businesses
One reason why the SaaS business model is such a profitable way to run a software business is its recurring revenue.
Traditional businesses with tangible products only generate income every time they make a sale. But for SaaS businesses, one sale can lead to months and even years of continuous revenue.
This predictable stream of income is one of the things that makes SaaS companies so appealing to investors.
That’s why it’s very important for SaaS business owners to understand how to calculate monthly revenue.
Knowing how to calculate monthly revenue can help you make important decisions about how to price your product, how to invest in growth, and how to forecast your future earnings.
In this article, we’ll discuss several different ways to calculate monthly revenue for a SaaS business.
Why SaaS Businesses Need To Calculate Monthly Revenue
Monthly recurring revenue is the lifeblood of any SaaS business.
It’s what allows you to keep the lights on and pay your employees. It’s also a key metric for investors and analysts who want to assess the health of your business.
But aside from the obvious reasons why you need to measure your monthly revenue, here are some other benefits of doing it:
It Can Help You Forecast Future Revenue
If you know how much revenue you generated last month, you can have a pretty good idea of how much revenue you’ll generate next month.
Considering this along with past data on your revenue growth can be really helpful for making long-term plans and forecasts.
It Helps You Set A Budget For Business Growth
Calculating your monthly revenue can also help you set a budget for reinvesting back into your business.
If you want to grow your business, you’ll need to invest in things like marketing, product development, and sales. But it’s important to make sure that you’re not spending more than you’re bringing in.
Measuring your monthly revenue can give you a good idea of how much you can afford to reinvest back into your business without putting it at risk.
It Can Help You Evaluate Your Churn Rate
The customer churn rate is the percentage of customers who cancel their subscriptions each month. It’s a key metric for any SaaS business, and it’s closely related to monthly revenue.
Losing customers is inevitable for any SaaS business. But that doesn’t mean there’s nothing you can do about it.
If you know how much revenue you generated last month and how many customers you lost, you can calculate your revenue churn rate.
This information can be really valuable for making decisions about how to reduce churn and keep more customers in the long term.
It Can Attract Investors
If you’re looking to attract investors, one of the first things they’re going to want to know is how much monthly recurring revenue your business is generating.
Along with other metrics used for SaaS company valuation, that is.
Having this information can make a big difference in whether or not you’re able to get the funding you need to grow your business.
Now, to the main event. How do you actually measure your monthly revenue?
Let’s talk about how to calculate monthly revenue for SaaS companies.
1. Monthly Recurring Revenue (MRR)
The monthly recurring revenue (MRR) is the main SaaS financial metric in tracking how much money you are making month to month.
The MRR formula is relatively simple: it’s the total amount of recurring revenue that you are bringing in each month, from all customers.
Recurring revenue is defined as any income that a customer pays on a regular basis. This can include things like monthly subscription fees, usage-based fees, and even premium support fees that are paid every month.
To calculate your MRR, simply add up all of the recurring revenue that you are bringing in each month, from all customers.
But MRR isn’t that simple. You see, there are many factors that can affect your MRR in a good or bad way.
This gives us other types of MRR:
New MRR: This is the additional MRR that you are bringing in each month from new customers.
Expansion MRR: This is the additional MRR that you are bringing in each month from existing customers who are upgrading their subscription plans or increasing their usage.
You get this type of MRR by upselling to your existing customers.
Churn MRR: this is the recurring revenue that you are losing each month from customers who cancel their subscriptions or downgrade their plans.
Contraction MRR: This is the recurring revenue that you are losing each month from customers who reduce their usage or downgrade their subscription plans.
The goal of any SaaS business should be to grow their new MRR while minimizing churn MRR and contraction MRR.
2) Net New MRR
Net new MRR is a SaaS financial metric that can help you measure how much your customer acquisition and upselling efforts affect your monthly revenue.
The net new MRR formula is a bit more complex than MRR, but it can give you a more accurate picture of your monthly recurring revenue.
It takes into account how your new customers, expansion, churn, and contraction affect your bottom line. It tells you how much how your business is growing despite setbacks caused by customers canceling or downgrading their subscriptions.
To calculate your net new MRR, add your new MRR and expansion MRR then subtract your churned MRR and contraction MRR.
For example, let’s say your business has the following metrics:
New MRR: $2,000
Expansion MRR: $500
Churn MRR: $250
Contraction MRR: $200
Your net new revenue would be ($2,000 + $500) – ($250 + $200) = $2,050.
That means despite customers canceling and downgrading their subscriptions, your MRR has still grown by $2,050 thanks to your new customers and existing ones that upgraded.
3) Net Revenue Retention (NRR)
Another popular way to track how much money you are making each month is with the net revenue retention (NRR). This is also sometimes called net dollar retention (NDR).
If net new MRR is a way to measure your customer acquisition performance in financial terms, NRR measures how your customer retention efforts affect your monthly revenue.
To find your NRR, you need four specific types of MRR:
- Starting MRR (Your MRR at the beginning of the month)
- Expansion MRR
- Churn MRR
- Contraction MRR
To calculate your NRR, add your starting MRR and expansion MRR and then subtract your churn MRR and contraction MRR.
That will tell you (in terms of dollars) how much your MRR has grown within the past month.
For example, let’s say your starting MRR was $10,000 and your expansion MRR was $2,000. But your churned MRR was $1,500 and your contraction MRR was $500.
That would give you an NRR of ($10,000 + $2,000) – ($1,500 + $500) = $10,000.
NRR can be a helpful metric for measuring your customer retention strategy because it’s not affected by how many new customers you acquire each month.
Most SaaS businesses also track the net revenue retention rate, which your NRR expressed in terms of percentage.
To calculate your NRR rate, simply divide your NRR by your starting MRR.
So, in the example above, the NRR rate would be ($10,000/$10,000) = 100%.
Ideally, you should have an NRR rate of 100% more, which would mean that you were able to at least maintain your MRR from your existing customers.
Although benchmarks for the NRR may vary depending on your target market.
If your NRR rate is below 100%, you may need to revisit your customer retention strategies and work on more ways to reduce churn.
4) SaaS Quick Ratio
The SaaS quick ratio is another SaaS growth metric that measures your capability to grow your revenue despite churn and downgrades.
Don’t confuse this one with quick ratio, the metric for measuring short-term liquidity.
The SaaS quick ratio considers both the new recurring revenue that comes from both new customers and upsells.
Like net new MRR, finding it would require the following types of MRR:
- New MRR
- Expansion MRR
- Churn MRR
- Contraction MRR
To calculate your SaaS quick ratio, add your new MRR and expansion MRR. Then divide the resulting figure by the sum of the churn MRR and contraction MRR.
For example, if you have the following MRR metrics:
New MRR: $2,000
Expansion MRR: $500
Churn MRR: $250
Contraction MRR: $200
Your SaaS quick ratio would be ($2,000 + $500)/($250 + $200). That would give you a ratio of 4.
This means for every dollar you lose due to churn and downgrades, you make up for it with $4 from new customers and upgrades.
Ideally, your SaaS quick ratio should be more than 4.
This means you have a pretty comfortable gap between gains and losses. This also indicates a steep upward growth curve.
A SaaS quick ratio of 1 to 4 is still safe. You’re at least making up for your losses due to churn and downgrades. But you still need to take action to minimize these losses and/or boost your customer acquisition and upselling efforts.
If you end up with a value less than 1, then it means you’re on a downward curve. You need to find the reason why you’re losing customers and address it as soon as possible.
The SaaS quick ratio is a good metric to use if you want to track how quickly your business can offset any revenue losses caused by churn or contraction.
It’s also useful for comparing the growth potential of different SaaS companies, as businesses with a higher quick ratio are typically able to generate.
5) Average Revenue Per User (ARPU)
The average revenue per user (ARPU) is a simple SaaS metric that tells you how much money, on average, you are making from each of your customers.
To calculate ARPU, simply divide your total monthly recurring revenue by the number of customers you have.
For example, if your business has 100 customers and your total MRR is $10,000, your monthly ARPU would be ($10,000/100) = $100.
ARPU can be a helpful metric for assessing how effective your pricing strategy is and how much value customers see in your product.
It can also help you compare the revenue generated by different customer segments or plan for future growth.
6) Gross Income
Gross income is a financial metric that tells you how much money your have after you pay all for the costs of operating your SaaS business.
To calculate gross income, simply subtract the cost of goods sold (COGS) from your total revenue.
For example, if your business has $10,000 in revenue and $5,000 in COGS, your gross income would be ($10,000 – $5,000) = $5,000.
Gross income can be a helpful metric for assessing the profitability of your business and comparing it to other businesses in your industry.
It’s also a key metric for calculating your business’s tax liability.
Now, figuring out the COGS for a SaaS business may get tricky.
After all, it’s easier for a tangible product, right? If you’re in the manufacturing industry, COGS intuitively includes the costs for raw materials, production, and labor. For retail, it’s simply the cost of the inventory.
But how do you determine the COGS for an intangible digital product like SaaS?
It’s important to remember that your COGS includes more than just the direct costs associated with providing your service or product.
For a SaaS business, COGS would include things like hosting fees, office utility expenses, employee salaries, and license fees for SaaS products that you use for your business operations.
Final Thoughts About Calculating Your Monthly Revenue
The monthly revenue is one of the most important numbers to track for any SaaS business.
Not only does it give you a snapshot of your business’s current financial health. But it can also help you track your progress over time and make more informed decisions about where to allocate your resources.
Various metrics can help you see how much your monthly revenue is growing thanks to your customer acquisition and upselling efforts. You can see how much you are growing despite churn and subscription downgrades.
However, these monthly revenue metrics are not the only ones you should be tracking.
To get a complete picture of your business’s financial health, you need to track a variety of other related SaaS KPIs, such as lifetime value (LTV), customer acquisition costs (CAC), and the LTV CAC ratio.
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