Buyers love recurring revenue. Why? Because they can predict their return on investment and easily compare your business to others on a similar revenue model. It derisks the acquisition and can potentially justify a higher valuation.
Take advantage of buyers’ love for subscription-based income, and you’ll attract more attention when listing your startup on Acquire.com and drive better offers.
While it might take a few months to integrate recurring revenue into your business model, one of the more important metrics to track when you do is monthly recurring revenue (MRR).
Monthly recurring revenue (MRR) is the income you expect to make every month. Due to subscription pricing models, you can predict how much money your company will make throughout the year based on your number of subscribers.
Below, we’ll help you understand MRR, how to measure it, and how it works so you can increase the overall success of your startup.
What Is MRR?
Monthly recurring revenue (MRR) is the predictable total revenue from all active subscriptions in a particular month. Using this single, trackable metric, you can measure performance over time while accounting for the recurring charges from your subscription.
Why Is MRR a Good Metric to Track?
Unlike businesses that rely on single-purchase sales or limited-time contracts, subscriptions offer steady, predictable revenue. Tracking your MRR helps budget for future short or long-term projects like experimenting with new sales tactics or trialing a new product. Knowing your MRR means you know what you can afford to lose that month if the projects flop.
The metric also measures your company’s short-term performance. Annual analytics serve a purpose, but tracking monthly metrics helps you make quick changes to improve your product. Perhaps one subscription tier loses tons of revenue as people downgrade or cancel. You can flag that change and begin running diagnostics to fix the issue.
Finally, if you ever hope to sell your startup, you’ll want to earn a high MRR to command a higher valuation. Buyers commonly rely on multiples of your revenue or profit to value your business, so you want to know and grow your MRR as much as possible before exiting.
Why Is MRR Important in SaaS Businesses?
SaaS businesses rely on MRR metrics more because they almost always use subscription revenue models. Since you know how much you charge subscribers each month, you can easily predict how much revenue you’ll earn (MRR).
Plus, SaaS businesses market their ability to quickly resolve technical issues in the cloud. Measuring MRR and where it increases or decreases is your first step in understanding which aspects of your product need updating. Tracking MRR dips helps you pinpoint issues and start running diagnostics on them quickly.
What Are the Types of MRR?
Basic MRR is just the average monthly income you earn from subscribers. But your income fluctuates depending on new subscribers, upgrades, cancellations, and more. To see how those fluctuations impact your revenue, measure the different MRR types below.
- New MRR is additional revenue from new customers in a month.
- Upgrade MRR is additional revenue from subscribers upgrading from one pricing tier to another in a month. This includes any add-ons.
- Downgrade MRR is the reduced revenue from subscribers who downgrade from one pricing tier to another, cheaper tier in a specific month.
- Expansion MRR is the additional revenue from existing customers in one month compared to the previous month. This includes add-ons, upsells, and cross-sells. Since you’re comparing it to the previous month, expansion MRR can be a negative value to show revenue lost as customers downgrade or drop add-ons. Positive expansion MRR shows you retained customers for that month.
- Churn MRR is the revenue lost to subscription cancellations in a specific month. See the FAQs below to learn more about gross and net MRR churn.
- Reactivation MRR is the monthly revenue from previously churned customers returning to a paid plan. A high reactivation MRR shows you know how to win back lost customers.
- Contraction MRR is the revenue lost to subscription cancellations AND downgrades during a particular month. You’ll see a higher contraction MRR if customers cancel, downgrade to a lower-priced plan, pause their subscription, use credits or a discount, or stop using an add-on.
- Net New MRR measures how much your revenue has grown or shrunk in the current month compared to the previous. It’s the inverse of net MRR churn, so a positive net new MRR indicates revenue gained while a negative net new MRR indicates revenue lost. We’ll learn how to calculate net new MRR below.
How Is MRR Calculated?
To properly track your MRR, calculate it monthly based on your subscription data. For your basic MRR, collect your number of subscribers and the average revenue per user (ARPU – typically the average of how much your customers pay divided by your total customers) and apply it to the formula below.
For example, say you have 100 subscribers and charge $50 a month for one subscription tier. Your MRR would equal $5,000 = 100 subscribers x $50/month.
What if you only charge yearly subscriptions? You would just take the annual ARPU and divide it by 12 to get your normalized MRR. For example, 70 subscribers x ($550/year/12) = 70 x 45.833 = $3,208.33.
Finally, if you want to know what your net new MRR rate equals, collect your total new MRR, expansion MRR, and contraction MRR for a given month. Plug these totals into the formula below.
If you have $3,000 in new MRR, $6,000 in expansion MRR, and $4,000 in contraction MRR, your calculation would look like this: 3,000 + 6,000 – 4,000 = $5,000 = Net New MRR. Remember, positive values mean gained revenue, so that would be a win for this month.
How Do You Calculate Net MRR Growth Rate?
After you calculate your basic MRR, what do you do with the information? One way to evaluate it is to measure your net MRR growth rate, which shows the net increase or decrease in MRR from one month to the next. SaaS businesses use the MRR growth rate to see how fast their business is growing and to compare it to others.
Follow the formula below to calculate your net MRR growth rate.
Imagine you earned $13,000 in MRR last month and $18,000 in MRR this month. The net MRR growth rate would equal ((18,000 – 13,000) / 13,000) x 100 = 39 percent growth.
What Is a “Good” MRR?
Is there a quantifiable “good” MRR you should aim for?
Generally, no, there is no benchmark. You just want to constantly increase your MRR from month to month, showing growth over time. To compare your business’s MRR to another company’s, compare the growth rate instead.
According to venture capitalist Tomasz Tunguz, pre-Series A SaaS startups aim for a 15 to 20 percent MRR growth rate. Although, realistically, most SaaS businesses fall in the 10 to 15 percent range, per SaaStr founder Jason Lemkin.
A high MRR growth rate shows potential investors and buyers your company’s ability to scale over time. In some cases, evidence of that ability is more valuable than hitting a specific number. It means you put the infrastructure in place to help your business grow and hit whatever benchmark you decide to implement.
But you can’t produce a high growth rate without learning how to increase your MRR.
How to Increase Your MRR
Below, we’ve outlined several strategies to help you increase your MRR.
- Boost your cross-sell and upsell sales. You likely sell more than one product. Showcase the value of your additional products or higher subscription tiers to increase your upsell and cross-sell sales. Use testimonials and case studies to highlight how much users gain from your highest subscription tier. According to Semrush, you have a 60 to 70 percent chance of selling to existing customers versus a 5 to 25 percent chance of selling to new customers. Persuade satisfied existing customers that they’ll enjoy the benefits of a new product as much as the one they currently use.
- Offer multiple pricing options. Can’t hook potential customers on your monthly subscription plan? Try offering a discounted annual subscription instead. Shave off a few dollars if they go for a 12-month plan rather than a month-to-month plan. Providing multiple options for purchase gives customers a chance to consider the benefits of each plan and how much they’ll save by going all-in on a longer or higher-paying subscription.
- Eliminate your freemium model. Freemium models work well as a marketing tool to attract new customers. But few will upgrade to a paying tier if they gain all the benefits they want from the free version. Instead, convert your freemium model into a limited-time free trial to give users the same experience. Increase your upsell marketing methods to help them see why it’s worth paying full price for your cheapest subscription.
- Focus on customer retention and minimize churn. Customer churn is when your SaaS business loses customers (and thus the revenue they generate) over months, quarters, or years. It’s a major pain point for SaaS businesses and should be minimized to zero if possible. One way to combat churn is to focus on customer retention. To keep customers, offer new benefits on your existing tiers, update your product with improvements, and check in with current customers to ensure they’re satisfied with your service. Forbes reports that 80 percent of your future revenue comes from just 20 percent of your existing customers, so keeping them happy is a top priority.
- Increase your lead generation to attract new customers. Not seeing much success with customer retention? Don’t count out new customers to also boost your revenue. Lead generation attracts potential customers to your business so you can convert them into paying customers over time. To learn more about generating new leads, check out our top five strategies.
How to Connect Your Metrics Automatically on Acquire.com
Thanks to Acquire.com’s new P&L Builder, you can connect your financial, customer, and web traffic metrics to your account automatically. Sharing data like your MRR, TTM, and average web users helps you build trust with potential buyers who can evaluate your data at-a-glance.
When you create a listing on Acquire, the page to connect your metrics appears after you tell us your startup name. Simply select the connect option for each category and follow the instructions on the next page.
For financial metrics, choose your accounting software (QuickBooks, Sandbox, Xero, etcetera) and then log in to connect your account to your Acquire.com listing.
Customer metrics are integrated through ChartMogul, so you’ll make an account through that site and connect it to your customer metrics software (Stripe, Braintree, Paypal, Chargebee, Apple App Store, Google Play Store, and more).
Web traffic metrics will run through your Google Analytics account, so simply sign in and select the property you want to sync with your Acquire.com account.
There you have it! For more information and to see the P&L Builder results from the buyer’s perspective, check out the video from CEO Andrew Gazdecki below.
What Is Gross MRR Churn?
Gross MRR churn is the percentage of monthly recurring revenue (MRR) lost to canceled subscriptions and downgrades. It helps you see where your company loses money aside from cancellations. Perhaps hundreds of subscribers downgrade from a certain subscription tier, showing that you need to evaluate the performance or benefit of that tier. Or maybe people drop a specific add-on or revert to your freemium level.
Either way, by calculating your gross MRR churn with the formula below, you can track your lost revenue throughout the year and make any necessary changes to your product. To calculate gross MRR churn, gather your total downgraded MRR, canceled MRR, and MRR at the beginning of the month.
What Is Net MRR Churn?
Net MRR churn is the percentage of revenue you gain or lose in a month due to cancellations and upgrades from existing customers. Unlike gross MRR churn, it accounts for expansion MRR (when existing subscribers accept upsells, cross-sells, add-ons, or price increases).
You use net MRR churn to gauge whether customers were more or less satisfied that month with your pricier products or tiers. If the expansion MRR outweighs the contraction MRR (downgraded and canceled MRR combined), your higher tiers and add-ons provided great value to your customers. A higher contraction MRR rate, on the other hand, shows where you need to improve your products and services.
To calculate net MRR churn, collect your contraction, expansion, and beginning-of-month MRR before following the formula below.
What Is ARR vs. MRR?
Annual recurring revenue (ARR) is the predictable revenue your company will generate over a year. While companies use MRR to track performance for short periods, ARR gives you a holistic view of your revenue success that year. It also helps you value your company for potential buyers or investors who want to assess overall performance.
Can MRR Be Negative?
Net MRR churn can be negative because you’re evaluating the revenue you made and lost. If your expansion MRR outweighs the churned MRR, it’ll create a negative value when you complete the calculation. Negative churn is something you want because it shows that you’re retaining customers or persuading them to upgrade.
For example, if your churned MRR equals $3,000 but your expansion MRR equals $5,000, and you start with $10,000 MRR at the beginning of the month, your calculation would look like this:
(3,0000 – 5,0000) / 10,000 = -0.2 = -20 percent net MRR churn.
What Is the Rule of 40?
The rule of 40 is a benchmark for SaaS companies to generate a combined revenue growth rate and profit margin that equals or exceeds 40 percent. Measuring this benchmark helps you compare your company’s success to others and ensure you’re keeping up with industry standards. Plus, it makes your business look more attractive to potential buyers if you hope to exit one day.
You need two metrics to calculate whether you pass the Rule of 40: your revenue growth rate and profit margin. For example, if your growth rate is 20 percent and your profit margin is 25 percent for a combined 45 percent, you pass the Rule of 40.
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