How To Track Your SaaS Recurring Revenue
When it comes to distributing software products, the SaaS business model has now become the norm. Gone are the days when software was purchased at a one-time, up-front cost.
Instead, most software is now delivered as a service, on a recurring basis. This shift has had a major impact on how businesses track and measure their revenue.
In the past, businesses would simply track their total software sales. But with the SaaS model, businesses need to track their SaaS recurring revenue.
In this article, we will talk about the SaaS recurring revenue model: what it is, how to track it, and SaaS metrics for measuring it.
What Is The Recurring Revenue Model?
The recurring revenue model is a type of subscription-based pricing where customers pay for access to a service on a recurring basis. This could be monthly, quarterly, or annual.
The key differences between the traditional software pricing model and the recurring revenue model are the distribution and revenue stream.
Traditionally, software products were sold as mere digital goods, through disks and other portable storage devices. People bought them one license at a time. And the revenue was also one-time per license.
But with the recurring revenue model, the software is delivered as a service and people pay for access to that service on a recurring basis. The revenue is also continuous.
This means that SaaS businesses need to track not only their sales but also their recurring revenue.
How To Track Your Recurring Revenue
As we mentioned earlier, recurring revenue can come at different intervals.
Some of your customers are paying monthly. Some pay annually. If you offer biennial plans, they may even pay every two years. It all depends on the billing cycles and pricing models that you’ve set up.
So with all that needs to be considered, how can you track your recurring revenue accurately?
There are two key metrics that you need to track: annual recurring revenue (ARR) and monthly recurring revenue (MRR).
However, there are also other specific types of recurring revenue than may increase or decrease your monthly earnings.
Let’s talk about them in more detail.
1) Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is the total value of all recurring revenue from customers, over the course of a year.
This metric is important because it gives you a snapshot of your business’s health and growth potential.
To calculate your ARR, simply add up all of your recurring revenue for the year. If you have monthly, quarterly, or multi-year subscriptions, you will need to annualize them.
For example, let’s say you have 100 customers who each pay you $100 per month, 80 who spend $1000 per year, and 50 who spend $1,600 biennially.
Annualizing these recurring revenues would look something like this:
100 customers x $100/month x 12 months/year = $120,000/year
80 customers x $1000/year = $80,000/year
50 customers x $1,600/2 years = $40,000/year
Adding them together, you would get this value:
$120,000 + $80,000 + $45,000 = $240,000
This means that your SaaS company is generating $240,000 in recurring revenue each year.
2) Monthly Recurring Revenue (MRR)
While annual recurring revenue gives you a big-picture view of your business, monthly recurring revenue (MRR) is a more immediate metric.
MRR is a measure of the recurring revenue that you’re bringing in each month.
And it’s important to track because it can give you early warning signs if your growth is slowing down.
If you have already calculated your ARR, calculating your MRR is simply dividing your ARR by 12 since there are 12 months in a year.
For example, if your ARR is $240,000, then your MRR would be $20,000.
But if you haven’t calculated your ARR yet, you can still calculate your MRR by adding up all of your recurring revenue for the month. For quarterly, annual, and multi-year subscriptions, you need to compute how much revenue you make per month out of those deals.
To do this, simply divide the total contract value by the number of months in the contract.
For example, imagine you have 80 customers who each pay $120 per month, 60 who spend $300 quarterly, and 60 who pay $1,000 annually.
Your MRR calculation would look something like this:
80 customers x $120/month = $9,600/month
70 customers x $300/3 months = $7,000/month
60 customers x $1,000/12 months = $5,000/month
Adding them all together, you get a total of $21,600 in monthly recurring revenue.
3) MRR Gains & Losses
Just because you have a recurring revenue stream doesn’t mean it will stay the same month after month or year after year.
After all, you still want to grow your SaaS business, right?
There will be times when you experience gains, such as when you acquire a new customer or get an existing customer to upgrade their subscription.
There will also be times when you experience losses, such as when a customer cancels their subscription or downgrades to a lower-priced plan.
Here are recurring revenue gains and losses that can affect your bottom line:
New MRR: This is the additional MRR you get when you acquire a new customer.
Expansion MRR: This is the additional MRR you get when an existing customer expands their usage of your service in some other way.
This includes switching to a higher-priced subscription, adding more users to their account, or buying add-on products that you’re offering.
Upgrade MRR: This is the additional MRR you get when an existing customer upgrades to a higher-priced subscription.
You may choose not to track it since it’s already included in your expansion MRR. But if you have both upselling and cross-selling strategies in place, it can be helpful to track this metric to distinguish your upselling performance from cross-selling.
Churn MRR: This is the MRR you lose when a customer cancels their subscription.
Contraction MRR: This is the MRR that you lose when an existing customer reduces the number of users on their account or cuts back on their usage of your service in some other way.
Reactivation MRR: This is the MRR you regain when a customer who had previously canceled their subscription reactivates their account.
Some businesses just count this as a new MRR. But if you want to measure how well your reactivation efforts are performing, it’s helpful to track this as a separate metric.
So with all these gains and losses that can affect your recurring revenue, how can you really track how much money your SaaS business is making?
That brings us to our next metric.
4) Net MRR
To get a more accurate picture of your recurring revenue, it’s important to track your net MRR.
Net MRR is your monthly recurring revenue after taking into account all gains and losses.
Finding your net MRR requires these types of MRR:
- Existing MRR (Your starting MRR at the beginning of the month)
- New MRR
- Expansion MRR
- Churn MRR
- Contraction MRR
To calculate your net MRR, take your existing MRR, add your gains (new MRR and expansion MRR), and subtract your losses (churn MRR and contraction MRR).
For example, let’s say your starting MRR is $10,000. You add $1,000 in new MRR and $500 in expansion MRR. But you also have $400 in churn MRR and $200 in contraction MRR.
Your net MRR for the month would be:
$10,000 + $1,000 + $500 – $400 – $200 = $10,900
As you can see, tracking your net MRR gives you a more accurate picture of your recurring revenue as it considers gains and losses you may have had during the month.
It gives you a small glimpse of your revenue growth’s resilience despite incurring some losses from churn and downgrades.
But how do you measure your revenue growth in more detail?
We measure the growth rate.
5) Net MRR Growth Rate
It’s a good key performance indicator (KPI) to track as it shows you whether your net MRR is increasing or decreasing over time.
To calculate your net MRR growth rate, take the difference between your current month’s Net MRR and the previous month’s net MRR. Then divide the resulting figure by the previous month’s net MRR.
For example, let’s say your net MRR last month was $10,000. This month, it’s $11,100.
Your net MRR growth rate calculation would look something like this:
($11,100 – $10,000) / $10,000 = 11%
This means that your net MRR grew by 11% from last month to this month.
6) Net New MRR
If you want to see how much recurring revenue you are getting from your customer acquisition and upselling efforts, you can track your net new MRR.
Net new MRR is the sum of your new MRR and expansion MRR minus your churn MRR and contraction MRR.
For example, let’s say your company has the following recurring revenue growth numbers for the month:
New MRR: $5,000
Expansion MRR: $3,000
Churn MRR: $2,000
Contraction MRR: $1,000
In this case, your net new MRR would be:
$5,000 + $3,000 – $2,000 – $1,000 = $5,000
As you can see, despite having some customers that cancel their subscriptions or reduce their usage, your company was still able to grow its recurring revenue by $5,000 thanks to new customer acquisitions and expansions.
7) Gross Revenue Retention (GRR)
Since the SaaS business model relies on recurring revenue, it means you need to keep a continuous relationship with your customers.
So aside from customer acquisition, you also need to focus on customer retention if you want to be successful.
In fact, customer retention is more important than customer acquisition in the long run as it costs more to acquire a new customer than it does to keep an existing one.
Churn is inevitable in any business with a recurring revenue model. So it’s a matter of minimizing it as much as you can and making sure that it doesn’t exceed the benchmark.
So how do you measure the recurring revenue you are maintaining as a result of customer retention?
That’s where the gross revenue retention (GRR) metric comes in.
GRR measures the percentage of revenue you retain from your customer base from one month to the next.
To calculate your GRR, subtract your churn MRR and contraction MRR from your existing MRR. Then, divide the resulting figure by your existing MRR.
For example, let’s say your company has the following recurring revenue numbers for the month:
Existing MRR: $10,000
Churn MRR: $2,000
Contraction MRR: $1,000
In this case, your GRR would be calculated as follows:
($10,000 – $2,000 – $1,000) / $10,000 = 90%
This means that you were able to retain 90% of your MRR from last month.
In a perfect world, you would retain 100% of your customer base and all of their recurring revenue every month. But anyone in the SaaS industry knows (sometimes too well) that it’s almost never the case.
Churn is sometimes unpredictable, especially if you’re a young company with a customer base composed of other startups.
That’s why the benchmark for GRR varies depending on the composition of your customer base. If you’re catering to small and medium-sized businesses (SMBs), a GRR of at least 80% is still considered okay.
However, the bar is higher for SaaS companies that focus on enterprise customers. In this case, a GRR of 90% is considered the minimum.
8) Net Revenue Retention (NRR)
Where there is a “gross”, there is also a “net”, right?
Let’s talk about net revenue retention (NRR), which is also sometimes called net dollar retention (NDR).
While GRR is a great metric for assessing how your customer retention strategy impacts your bottom line, NRR (literally) brings expansion revenue into the equation.
To calculate your NRR, add your existing MRR and expansion MRR then subtract your churn MRR and contraction MRR. Then divide the difference by your existing MRR.
For example, let’s say your starting MRR is $10,000. You add $3,000 in expansion MRR but you also have $600 in churn MRR and $400 in contraction MRR.
Your NRR calculation would look something like this:
($10,000 + $3,000 – $600 – $400) / $10,000 = 120%
This means that you were able to grow your recurring revenue from existing customers by 20% despite churn and contraction. So you must be doing something right with your customer retention and upsell strategies.
While an NRR greater than 100% is ideal, it’s not always realistic. Like with GRR, the standard varies depending on your customer base.
If your customers are mostly SMBs, an NRR as low as 90% is still normal. While SaaS companies that cater to enterprise markets should have an NRR somewhere around 120%.
9) Average Revenue Per User (ARPU)
The Average revenue per user (ARPU) metric is pretty much what it sounds like. It measures how much revenue you’re generating from each customer, on average.
To calculate your ARPU, take your total recurring revenue and divide it by the number of customers you have.
You can calculate your ARPU either in annual terms or monthly.
For example, let’s say your total MRR is $10,000 and you have 100 customers. Then your monthly ARPU is $100.
Knowing your ARPU is important because it helps you understand your customers.
For example, you can segment your customer base and find the ARPU for each segment. This would tell you which segments are more valuable to your business.
What’s more, the ARPU is instrumental in calculating another SaaS metric called the customer lifetime value (CLV).
CLV measures how much revenue you can expect to generate from a single customer over the course of their relationship with your SaaS company.
Final Thoughts About SaaS Recurring Revenue
SaaS recurring revenue is the lifeblood of any SaaS business. That’s why it’s so important to track and measure it using the right SaaS financial metrics.
But the thing about recurring revenue is that it changes over time.
It is affected when you lose a customer or acquire a new one. It also changes when your existing customers upgrade or downgrade their subscriptions.
To get an accurate picture of your company’s financial health, you’ll also have to go beyond the recurring revenue.
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