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Monthly recurring revenue (MRR) is the total amount of money that a company receives on a monthly basis from its subscribers. This metric is commonly used among SaaS subscription-based companies and serves as a key metric that shows predictable revenue for companies with a subscription business model.
Subscription-based SaaS companies will always have new clients signing up for the product as well as old clients churning. This continuous fluctuation can make it difficult to calculate the average monthly revenue for your current customer base.
It is important to note that annual subscriptions, subscription plan adjustments, and any one-time fees are typically not included in the regular monthly revenue calculation, which can cause inaccuracies within forecasts. However, when done correctly, this simple formula helps forecast future revenue, providing greater insights to business owners on where to invest, how to plan, and how to budget in the future.
Why is MRR important?
Put simply, the MRR helps subscription model businesses forecast future cash flows and budgets. The MRR growth rate can also be calculated to show how MRR is growing over time while factoring in new monthly subscriptions and churn rates. This key performance indicator paints a clear view of an organization’s overall health. These actionable insights gained through this process allow a company to better plan and prepare for the future.
How to calculate MRR
This financial metric can easily be calculated just by multiplying the number of monthly subscribers by the average revenue per user (ARPU). All annual subscriptions can be calculated by dividing the annual contract price by 12 (representing each month in a year) and then multiplying that number by the total customers on an annual contract.
MRR = Average Revenue Per User x Number of Paying Users
How to interpret MRR
The MRR metric is a representation of a company’s current client base and its relationship to its subscription accounts. This allows business leaders to better understand their customer’s behavior and gain greater insights. If monthly revenue increases, this is a good indication that there has also been an increase in customer acquisition. On the contrary, a decrease in MRR can indicate cancellations, downgrades, and higher churn rates. The recommended benchmark for MRR is between 10 – 20%
