What Is MRR in SaaS: How to Calculate and Boost for Growth
The SaaS market value is projected to be $152 billion in 2021 and to increase to $208 billion by 2023. The market has grown exponentially and is now more competitive than ever. If you want your SaaS business to thrive, you need to understand and measure metrics such as monthly recurring revenue (MRR).
MRR is a key tool that can help you manage and measure the progress of your SaaS business. It gives founders insights into the health of their company, financial forecasting capabilities, and more actionable data on their customer base. Keep reading to find out more about MRR in SaaS, including how to calculate it and strategies for boosting your annual revenue.
MRR: What is Monthly Recurring Revenue?
MRR is an abbreviation for Monthly Recurring Revenue. MRR is a financial metric used to measure and track the revenue generated within a subscription-based software-as-a-service (SaaS) model. MRR helps calculate and measure the impact of customer growth, churn, price changes, and one off payments in SaaS companies.
MRR is a crucial financial metric as it’s able to portray the stability of a SaaS business over time as well as reflect performance against monthly goals. MRR provides real time data that paints an accurate picture of your businesses health so you can adjust your strategy accordingly and ensure long lasting success.
The Importance of MRR in SaaS
Here are some reasons why MRR is an important SaaS metric.
1. A More Predictable Revenue Stream
Tracking MRR can provide crucial insights and help SaaS businesses have a much more predictable income stream.
Having accurate metrics for MRR allows you to track your product’s usage, usage rates of new and existing customers, how many customers churn each month and more. With this knowledge, you can accurately forecast a stable cash flow for their business in future months, allowing you to plan out their marketing strategies knowing how much money you will likely get in return from them.
Additionally, tracking MRR regularly helps you identify opportunities to increase conversions, reduce churn and optimize pricing for maximum profitability. By utilizing this data-driven approach to managing revenues, you can foster a much more predictable financial forecast that can help take your business to the next level.
2. Easier to Scale
MRR allows SaaS business owners to accurately determine their revenue and plan growth strategies accordingly.
By analyzing MRR, you can track progress over time, identify any accelerating or decelerating trends in customer spending, and quickly take action to adjust your service offerings.
Furthermore, you can assess the impact of marketing promotions on the success of your business by comparing expected increases in sales against the actual numbers generated. By tracking MRR, you are better equipped with the knowledge needed to strategically plan for scaling without worrying about putting unnecessary stress on resources or finances.
3. Higher Customer Lifetime Value (CLV)
Tracking MRR is a great way for SaaS to build long-term relationships with customers. It enables you to better understand your customers’ usage habits, offering products and services that are most relevant to individual customers. With this understanding, you can provide personalized service and experiences that increase customer loyalty.
MRR tracking also allows you to measure customer churn rates and identify problem areas quickly. This helps them develop strategies and initiatives to reduce churn rates and increase their CLV over time. CLV is a measure of the average amount of money that a customer will spend with your company over the course of their lifetime.
Adding up these effects together, MRR tracking leads to higher user satisfaction, higher retention rates, and ultimately higher customer lifetime values overall.
4. Increased Customer Retention
By tracking MRR, you are able to review the progress of both newly acquired and existing customers and determine any anomalies between them. This helps you be more aware of potential issues that could lead to customer churn, while also allowing you the opportunity to identify areas in your services that may require improvement in order to guarantee customer satisfaction and ultimately maintain higher rates of customer retention.
Furthermore, tools such as predictive analytics can be used together with MRR tracking to identify changes in customer behavior that might indicate an increase or decrease in service use. With these processes implemented, you stand a much greater chance of keeping your customers loyal.
5. Improved Cash Flow
Tracking MRR allows for measuring progress of sales and marketing efforts over time, which helps business owners gain a better understanding of customer behavior. It pinpoints trends in revenue and shows if customers are becoming loyal and predictions on when customers might churn. This allows you to plan for future growth or make cutbacks accordingly, so that every cent is invested with an intention and thoughtful strategy.
Additionally, tracking MRR can identify areas where costs are becoming too high relative to sales generated, allowing you to focus on strategies that will drive more revenue while cutting expenses.
Furthermore, tracking MRR can also enable you to gain insight into your customer lifecycles, manage payment acceptance and send out invoices more accurately, improving your bottom line.
When done strategically and effectively, regularly tracking MRR can help optimize cash flow and ensure the business runs smoothly in the long run.
MRR and Sustainability
Tracking MRR is an important indicator of sustainability. It provides a clear way to monitor the frequency and consistency of customers re-investing in services over time. Not only does tracking MRR offer insight into the current state of your business, but it also helps reveal potential opportunities for growth, especially when trends are identified over longer periods.
This can be invaluable for guiding future financial planning, allowing managers to forecast product performance and plan for any significant changes in market demand.
Types of MRR
Below are the five main types of MRR:
1. New MRR
New MRR is the amount of new recurring revenue from newly acquired customers. It is the starting point of any MRR calculation as it includes all new customers that have started paying for a product or service.
Churned MRR measures the amount of Monthly Recurring Revenue (MRR) that was lost over a specific period as customers cancel their subscriptions. It is essentially the opposite of growth in MRR – by calculating your Churned MRR each month, you will be able to identify areas where improvement needs to be made.
Knowing your Churned MRR can help you anticipate when losses occur and develop strategies to ensure those losses are minimized or eliminated altogether. Although Churned MRR is most commonly associated with subscription-based models, it also applies to other forms of recurring revenue like per-transaction fees or usage-based fees.
Read How To Reduce Churn For SaaS Businesses to know more.
3. Expansion MRR
Expansion MRR measures the revenue earned from new customers and upsells to existing customers. Knowing your Expansion MRR can give you insight into how well your customer acquisition and retention strategies are performing.
Analyzing this data regularly can be used to improve CLV. It can also help you identify areas of focus for sales and product development teams, as well as see which pricing plans are most profitable for your business.
4. Contraction MRR
Contraction MRR describes cancellations of subscription-based services within a given month. It is calculated by taking the total revenue from cancellations and dividing it by the total MRR from the same period to get a percentage. This allows businesses to have a clear view of how much money they lost that month due to cancellations, thus being able to make better decisions on how to retain customers and drive revenue in the future.
Additionally, understanding what caused cancellations can prevent similar cancellations down the road, allowing these companies to increase their MRR numbers without having one-time purchases muddying up their data.
Having a good understanding of contraction MRR is important for businesses to maximize growth and manage cash flow efficiently in order to remain competitive and profitable. It provides key insights into customer retention/cancellation for subscription businesses as well as trends over time that could be attributed to product improvements, customer service initiatives, marketing campaigns, or other efforts.
5. Reactivation MRR
Reactivation MRR measures the revenue earned from customers who have previously churned but have decided to re-subscribe to your product or service. Analyzing this data can give you insight into why customers are leaving and returning, which can be used to improve retention strategies.
6. Downgrade MRR
Downgrade MRR measures the revenue earned when customers downgrade their subscription plan. Knowing your Downgrade MRR can help you identify any weaknesses in your product offering or customer engagement strategies. It can also show which features customers are not using, allowing you to focus on improving the ones that your users actually need.
How to Calculate SaaS MRR
Calculating MRR requires detailed data on subscription plans and customer usage patterns. This includes information such as plan length, renewal terms, customer churn rate and average revenue per user (ARPU). Once you have gathered all this information, you can calculate your MRR using these simple steps:
- Add up all revenue generated from monthly recurring subscriptions.
- Subtract any non-recurring fees (e.g., setup fees).
- Divide the total by the number of months in the billing cycle.
For example: If you have 10 customers paying $100/month for a 12-month period and one customer who pays an additional one-time fee of $50 upon signing up for their subscription plan, your MRR would be $950 ($10 x 100 – 50).
How to Calculate Net New MRR
Net new MRR measures the amount of additional revenue generated by acquiring new customers or upselling current ones. It does not include any revenue from existing customers who renew their subscriptions.
The formula for calculating net new MRR is:
New MRR + Expansions MRR – Contraction MRR – Churn MRR
Understanding your net new MRR helps you to better understand the drivers behind your company’s growth. It provides insights into customer acquisition costs (CAC), customer lifetime value (LTV), and other metrics related to customer retention and churn. It also allows you to identify areas where you need to focus your efforts in order to increase your customer base and retain existing customers.
Additionally, understanding net new MRR can help inform future growth strategies by providing data on which strategies are working best for customer acquisition and retention.
How to Get MRR Right
The formula for MRR is simple yet some commit mistakes on what to include and exclude in the calculation.
Things to Include in Your MRR Calculation:
When calculating MRR, it’s important to include:
- All recurring revenue from customers: This includes monthly, quarterly and annual subscriptions
- Customer upgrades: The additional amount a customer pays for an upgraded plan
- Customer downgrades: The amount paid by customers who downgrade their plans.
- All lost recurring revenues: This includes amounts incurred due to customer cancellations
- Discounts: This includes any discounts customers receive
Things to Exclude
It’s important to note that not all forms of revenue should be included when calculating MRR.
- Recurring costs such as hosting fees should not be included in the calculation since they do not represent actual revenues for the company.
- Additionally, bookings are not considered part of the calculation since they are one-time transactions rather than recurring payments.
5 Common Mistakes When Calculating MRR
Below are some of the most common mistakes when calculating MRR:
#1: Including quarterly, semi-annual, or annual contracts at full value in a single month
These contracts may not all renew each month and considering the revenue on them as recurring in a single month skews the actual picture of yearly or monthly performance significantly.
Additionally, such methods are also subject to considerable volatility when calculated with respect to periodical revenue. Thus, any sound financial forecasting should try to eliminate including quarterly, semi-annual, and/or annual contracts at full value in a single month as much as possible if MRR is sought to be accurately determined.
#2: Subtracting transaction fees and delinquent charges
Transaction fees generally refer to payment processing or gateway fees, while delinquent charges may include late fees associated with customer payments. Although expenses like these are necessary for running a business, they don’t reflect its real value over time.
To ensure an accurate assessment, one should leave out each of these costs when calculating MRR as they can create an unrealistic, inflated number.
#3: Including one-time payments
One-time payments can be a big mistake when calculating MRR because they don’t factor in that your company’s offerings may not be as constant month after month. A one-time payment can skew your MRR in one direction, making it very difficult to keep track of the actual recurring revenue numbers being generated.
This is especially true if you’re only tracking the initial purchase without factoring in any upcoming renewals or add-ons. If you incorrectly calculate MRR by including one-time payments, it could lead to miscounting your overall revenue and have an adverse effect on planning and forecasting.
#4: Including trials
When calculating MRR, it’s important to distinguish between customers who are in the midst of a trial period and those who have already committed to a subscription. It’s best practice to wait until customers have successfully converted from a trial period before including them in your MRR calculations
This way, you can be sure that your MRR numbers are reflective of true customer commitment and not artificially inflated by customers who have yet to commit.
#5: Excluding discounts
It’s important to remember that discounts are also a form of revenue, and as such should be included in MRR calculations. Although discounts may reduce the amount received from customers, they still contribute positively to overall revenues and should be accounted for accordingly.
6 Ways to Increase Your Monthly Recurring Revenue
Below are the five best strategies for increasing your MRR:
1. Create a strong value proposition
To create a strong value proposition, you need to understand why your product or service is valuable and make sure that value is communicated to potential customers. As part of this process, ask yourself what makes your offering different than similar products on the market and identify key benefits that your target audience will appreciate.
Additionally, benchmark current competitors’ offers against yours in order to ensure that you are providing a unique and enticing solution for users.
Finally, make sure the messaging around your value proposition is clear and concise by testing it on various audiences to ensure it resonates with them. revenue.
2. Get your pricing strategy right
To maximize MRR, look carefully at who your current customers are and what their needs are. Are there any specialized plans you can offer to target specific user groups?
Analyze competitors to get an idea of industry standards, but also use this opportunity to distinguish yourself and set pricing that reflects the quality of your product or service.
Once a strategy is established, it’s important to remain flexible and react quickly when customer feedback suggests room for improvement.
Keeping on top of market trends should help in ensuring that you’re staying on top of the competition while providing value at a price people are willing and able to pay.
Check out Your Complete Guide To SaaS Pricing to learn more.
3. Make it easy for customers to scale their usage and spend
Providing an agile platform that enables users to add or upgrade products and services quickly, with minimal cost commitment, is a great way to encourage scalability.
Additionally, ensuring that your pricing points are structured so that customers can easily adjust according to their needs is integral to monetizing scaling.
By offering these options and creating a transparent pricing system, you make it easier for customers to increase their usage and spending without major barriers or investments.
4. Identify and nudge upsell opportunities
One of the best ways to identify and nudge upsell opportunities that can increase your monthly recurring revenue is by studying your customers’ buying habits and recognizing when they’re most likely to be interested in an upgrade. Taking advantage of these moments is key – examine what items complement or enhance the products or services they already have, and use this opportunity to pitch an upgraded version.
Similarly, you can use discounts to incentivize customers who typically buy one-time items to instead opt for a subscription plan, which leads toward more consistent returns each month.
Finally, don’t forget about cross-selling – look for more ways that your existing customers may benefit from additional related products or services.
5. Make sure you’re calculating MRR correctly
To ensure MRR is accurately recorded and tracked, businesses need to have a process in place. This starts with analyzing customer data such as payments, downgrades, and cancellations; understanding churn rates; and taking note of the behaviors of long-term customers in order to measure loyalty.
Understanding customer life cycles can help companies recognize trends that influence yearly versus monthly payment amounts as well as anticipate changes over time.
Other key factors include being aware of applicable taxes in your region and regularly evaluating customer invoices and contracts to make sure they are up to date.
Finally, use automation tools whenever possible to track subscriptions and maintain accuracy with your calculations on a daily basis – all the while keeping an eye out for new opportunities that could lead to increased monthly recurring revenue.
6. Invest in online reviews
Proactively engaging in online review sites such as Yelp, Google and Tripadvisor allow you to capitalize on the power of customer referrals. For example, when a customer writes a positive review about your product or service it can lead to more customers choosing your product over others available on the market.
Furthermore, recent data show about 92% of customers rely on user reviews to make purchase decisions, so investing in online reviews will likely lead to more conversions and a larger customer base opting into your monthly subscriptions. Actively gathering online reviews may require some effort, yet the long-term benefits will be worth it.
In conclusion, understanding Monthly Recurring Revenue is essential for any SaaS entrepreneur or marketer looking for sustainable long-term growth for their business. Calculating and tracking MRR regularly will help them better understand customer retention rates and predict future revenue streams while giving invaluable insights into the success of their business model overall.
Utilizing strategies like focusing on customer retention, developing additional features/services targeted at high-value buyers, building relationships with influencers, and experimenting with different pricing models can all be effective ways of boosting a SaaS company’s monthly recurring revenue over time.
If you need more help in growing your SaaS business, don’t forget to check out our blog.