MRR
In the world of subscription-based businesses, MRR isn’t just another financial metric—it’s the heartbeat of companies that thrive on recurring income.
Whether you’re a fledgling SaaS startup or a seasoned subscription-based business, understanding MRR is the key to unlocking the steady growth of your business.
Let’s understand monthly recurring revenue in detail.
What is MRR?
MRR stands for Monthly Recurring Revenue. It represents the predictable and consistent income generated from subscription-based products or services.
Imagine you run a software company that offers a sales engagement platform. Your customers pay a fixed monthly fee to access your platform. The cumulative revenue per month from these subscriptions constitutes your monthly recurring revenue. It’s the predictable income that flows into your pocket month after month.
Example
SmartReach is a sales engagement platform that helps businesses increase their sales potential. It offers 3 service plans, viz., email automation, sales engagement, and prospect finder.
- Business A: Pays $29/month for the email automation subscription plan.
- Business B: Pays $49/month for the multichannel outreach subscription plan.
- Business C: Pays $15/month for ProspectDaddy.
Hence, Total monthly recurring revenue of SmartReach = $29 (Business A) + $49 (Business B) + $15 (Business C) = $93/month
So, SmartReach can expect to receive $93 every month from its existing subscribers, providing a predictable income stream to plan its business expenses and growth strategies. This continues until any of the businesses opts out or moves to an annual billing (ARR).
Why is monthly recurring revenue important?
Monthly recurring revenue isn’t just a financial metric; it’s a strategic compass. Here’s why it’s essential to measure monthly recurring revenue:
1. Revenue stability
MRR provides a steady stream of revenue, allowing you to cover operational costs, salaries, and growth initiatives. It’s like having a reliable paycheck.
2. Growth potential
By analyzing monthly recurring revenue trends, you can gauge your business’s health and identify growth opportunities. Is your MRR climbing steadily or fluctuating wildly?
3. Investor confidence
Investors love predictable revenue. A robust monthly recurring revenue signals a healthy business. When you pitch to investors, monthly recurring revenue is your secret weapon.
4. Budgeting
Budgeting isn’t about spreadsheets; it’s about survival. Monthly recurring revenue predicts your monthly business cash flow. So, you can understand how much resources to reinvest back into your business for growth. Imagine this:
- MRR: $10,000/month
- Expenses: Salaries, servers, marketing
- Decision Time: Can we hire that UX designer? Expand to a new market?
Based on the stage (growth, decline, etc.) of your business monthly recurring revenue, you can answer these questions.
Essentially, monthly recurring revenue helps you pinpoint those areas in the budget that need investment and those areas that need cut-off spending.
5. Revenue forecast
Monthly recurring revenue helps you make accurate sales projections and plan accordingly for short and long-term business growth. It directly correlates to your monthly sales figures keeping you informed on how much sales are needed to hit a particular digit in MRR the next month.
Let’s understand:
Monthly recurring revenue of your business is $80,000 in February. Given that there is no customer churn, you can predict that you will make $80,000 or more in sales revenue in March. To make this forecast even more insightful, let’s apply your historical sales growth rate (let’s say 5-6% M-O-M) to it.
Therefore, the standard sales forecast for March lies between $84,000 (i.e., $80,000 x 105%) and $84,800 (i.e., $80,000 x 106%) based on the historical growth rate. Keep in mind that this is an estimate, and actual results may vary.
How to calculate Monthly recurring revenue?
At its core, MRR is a straightforward calculation. Let’s break down the MRR calculation:
MRR = [ Average Revenue per Customer × Total Number of Customers ]
- Average Revenue per Customer (ARPA): Divide your total revenue by the number of active customers. E.g., If you earned $10,000 in a month with 100 customers, your ARPA is $100.
- Total Number of Customers: Count all active subscribers. Remember, churned customers don’t contribute to MRR.
By multiplying ARPA by the total number of customers, you arrive at your monthly recurring revenue.
This figure reflects the recurring revenue that flows into the business month after month.
Different Types of MRR
There are 6 types of monthly recurring revenue in the market, such as:
1. New MRR
New MRR represents the revenue acquired from fresh sign-ups.
For example, you onboard 20 new customers this month. The revenue generated from these fresh sign-ups will be counted as New MRR.
To boost new MRR, focus on effective lead generation, compelling product demos, and seamless onboarding experiences.
2. Churn MRR
Churn MRR is the flip side—the revenue lost due to customer cancellations.
For example, 10 existing customers of your business cancel their subscriptions this month. The revenue lost due to these cancellations will be counted as churn MRR.
For service-based businesses, churn is inevitable. Minimizing the churn is crucial. Dive into the reasons behind churn: Is it poor customer support, product dissatisfaction, or pricing issues? Address these pain points proactively to retain valuable subscribers.
3. Net New MRR
Net New MRR balances the scales. It considers both new sign-ups and churned customers.
Net New MRR= [ New MRR + Expansion MRR – Churn MRR ]
Positive net new MRR indicates growth; negative net new MRR calls for attention. It’s like a tag of war between customer acquisition and customer retention. Net new MRR provides the projection for sustainable revenue growth as it accounts for positive revenue growth every month.
4. Expansion MRR
Expansion MRR counts the revenue generated from the existing user base. This kind of revenue is usually generated when your existing customers upgrade their plans and their overall ticket size increases. Expansion MRR is a good indicator of customer loyalty and engagement.
5. Contraction MRR
Contraction MRR is exactly opposite to the expansion MRR. It occurs when your existing customers downgrade their subscription plans. It hurts the overall MRR for a particular month.
Contraction MRR may occur due to several reasons. Change of business needs, opting for better alternatives, change of business strategy, customer dissatisfaction, etc are some of the key reasons.
6. Reactivation MRR
Reactivation MRR measures the monthly recurring revenue generated from customers who were previously inactive but have re-engaged with your product or service. Essentially, it quantifies the impact of winning back customers and helps businesses evaluate the effectiveness of their reactivation efforts.
Strategies to boost MRR
Let’s take a look at some of the strategies to help you boost your monthly recurring revenue.
1. Pricing optimization
– Tiered plans
Offer multiple subscription tiers with varying features and pricing. Cater to diverse customer needs. Some may crave basic functionality, while others seek advanced capabilities. By providing tiered plans, you maximize revenue potential.
Example: Netflix offers Mobile, Basic, Standard, and Premium plans. Each tier caters to different user needs. Basic for casual viewers, Premium for binge-watchers.
– Upselling and cross-selling
Your existing customers are a goldmine. Upsell by encouraging them to upgrade to higher-tier plans. Cross-sell complementary services.
Example: Spotify nudges free users to upgrade to premium by offering an ad-free experience and offline downloads.
2. Customer retention
– Exceptional customer support
Quality customer support is non-negotiable. Swiftly address customer queries, resolve issues, and provide personalized assistance. Happy customers stick around.
Example: SmartReach provides 24/6 customer support with an avg. 6 mins response time to prevent churn. A user can contact SmartReach via website chat, email, zoom call, etc., for any product-related or other business issues.
– Customer engagement
Stay on your customer’s radar. Send newsletters, host webinars, and share product updates. Engaged users are less likely to churn. Remember, existing customers are your low-hanging fruit. Nurture them with relevant offers.
Example: SmartReach’s weekly newsletter ‘The Smart Newsletter’ keeps users informed and engaged about the latest sales innovations, techniques, etc. It’s like having coffee with your favorite business buddy every Thursday afternoon.
3. Expansion opportunities
– Paid add-ons
Introduce additional paid features, services, etc., to your existing product/service plan to make them more beneficial and attractive to the existing users.
Example: Adobe Creative Cloud lets users add individual apps (like Photoshop or Illustrator) to their subscriptions. It’s like building your creative toolbox.
– Usage-based pricing
Consider charging your customers based on their usage of your product/service.
For example: Amazon Web Services charges based on data storage and computing usage. Pay for your usage, like a utility bill.
4. Reduce Churn
– Analyze churn patterns
Dig into the data. Identify patterns—seasonal churn, feature-specific churn, or customer segment churn. Based on the insights, tailor your retention efforts.
– Offer incentives
Offer discounts, extended trials, or loyalty rewards to retain at-risk customers. These incentives help you retain customers as well as gain customer referrals. Sometimes a small gesture can prevent a big loss.
Example: Dropbox offers extra storage space to users who refer their friends. This referral program helps them in branding as well as in sales.
Monthly recurring revenue: conclusion
In conclusion, monthly recurring revenue is a vital metric for any subscription-based business that wants to measure and improve its performance.
By calculating and analyzing your monthly recurring revenue, businesses can gain insights into their revenue streams, customer behavior, and growth potential. MRR can also help businesses design effective pricing and marketing strategies, as well as identify and reduce customer churn.
Overall, monthly recurring revenue is not only a measure of the income of your business but also a measure of value for it.