The basic formula for calculating MRR is:
MRR = Number of Active Accounts × Average Revenue Per Account ARPA
MRR=Number of Active Accounts×Average Revenue Per Account ARPA
For annual or quarterly subscriptions, the revenue should be normalized to a monthly basis by dividing by 12 or 3, respectively.
Example Calculation
If a company has 50 active accounts, each generating $2,000 per month, the MRR would be:
MRR = 50 × 2000 = $ 100,000
MRR=50×2000=$100,000
Types of MRR
New MRR
Revenue from new customers acquired during the month, often referred to as New MRR, represents the additional monthly recurring revenue generated from customers who signed up for the service within that specific month.
Example:
Suppose a SaaS company offers a subscription service at $100 per month. In July, the company acquires 10 new customers. The New MRR for July would be:
New MRR=10 new customers×$100 per month=$1,000
New MRR=10 new customers×$100 per month=$1,000
This $1,000 represents the new recurring revenue added to the company’s monthly income due to the acquisition of these new customers.
Expansion MRR
Additional revenue from existing customers through upsells, cross-sells, and add-ons, often referred to as Expansion MRR, represents the extra monthly recurring revenue generated from existing customers who upgrade their plans, purchase additional features, or subscribe to complementary products.
Example:
Suppose a SaaS company offers a base subscription at $100 per month. In August, 5 existing customers upgrade to a premium plan costing an additional $50 per month, and 3 customers purchase an add-on feature for $20 per month. The Expansion MRR for August would be:
Expansion MRR=(5 upgrades×$50)+(3 add ons×$20)=$250+$60=$310
Expansion MRR=(5 upgrades×$50)+(3 add ons×$20)=$250+$60=$310
This $310 represents the additional recurring revenue added to the company’s monthly income due to upsells and add-ons purchased by existing customers.
Contraction MRR
Contraction MRR represents the revenue lost due to existing customers downgrading their subscription plans or reducing their usage of services.
Example:
Suppose a SaaS company has customers on a $100 per month plan. In September, 4 customers downgrade to a $50 per month plan, and 2 customers reduced their add-on services by $20 per month each. The Contraction MRR for September would be:
Contraction MRR=(4 downgrades×$50)+(2 reductions×$20)=$200+$40=$240
Contraction MRR=(4 downgrades×$50)+(2 reductions×$20)=$200+$40=$240
This $240 represents the monthly recurring revenue lost due to customers opting for lower-priced plans or reducing their service usage.
Churned MRR
Churned MRR represents the revenue lost from customers who cancel their subscriptions entirely.
Example:
Suppose a SaaS company has customers on a $100 per month plan. In October, 3 customers cancel their subscriptions. The Churned MRR for October would be:
Churned MRR=3 cancellations×$100=$300
Churned MRR=3 cancellations×$100=$300
This $300 represents the monthly recurring revenue lost due to customers who have completely discontinued their subscriptions.
Net New MRR
Net New MRR represents the net change in Monthly Recurring Revenue by accounting for the revenue gained from new customers and expansions and subtracting the revenue lost due to downgrades and churn.
Example:
Suppose in November, a SaaS company gains $2,000 in New MRR from new customers, $1,000 in Expansion MRR from existing customers upgrading, loses $300 in Contraction MRR from downgrades, and $700 in Churned MRR from cancellations. The Net New MRR for November would be:
Net New MRR=$2,000 New MRR +$1,000 Expansion MRR −$300 Contraction MRR −$700 Churned MRR =$2,000
Net New MRR=$2,000 New MRR +$1,000 Expansion MRR −$300 Contraction MRR −$700 Churned MRR =$2,000
This $2,000 represents the net increase in the company’s monthly recurring revenue after accounting for all gains and losses.
Reactivation MRR
Reactivation MRR represents the monthly recurring revenue generated from previously churned customers who have re-subscribed to a paid plan.
Example:
Suppose a SaaS company has customers on a $100 per month plan. In November, 3 previously churned customers reactivated their subscriptions. The Reactivation MRR for November would be:
Reactivation MRR=3 reactivations×$100=$300
Reactivation MRR=3 reactivations×$100=$300
This $300 represents the additional monthly recurring revenue gained from customers who returned after previously canceling their subscriptions.
Common Mistakes in Calculating MRR
Calculating Monthly Recurring Revenue (MRR) accurately is crucial for financial forecasting and business planning. However, common mistakes can lead to incorrect MRR figures:
Including One-Time Fees
Including one-time fees in MRR calculations is a common mistake. Only recurring revenue should be included, excluding one-time payments and variable fees. This ensures that MRR accurately reflects the predictable, ongoing revenue from subscriptions, providing a true picture of financial health and growth potential.
Example:
If a SaaS company charges a $100 monthly subscription fee and also receives a $500 one-time setup fee from a new customer, only the $100 should be included in the MRR calculation. Including the $500 setup fee would inaccurately inflate the MRR. Thus, the correct MRR from this customer is:
MRR=$100
Incorrectly Normalizing Revenue
Incorrectly normalizing revenue is a common mistake in MRR calculations. Annual or quarterly payments should be divided by 12 or 3, respectively, to reflect their monthly value accurately. This ensures that MRR provides a true monthly revenue figure, avoiding overestimation or underestimation.
Example:
If a SaaS company receives an annual payment of $1,200 from a customer, this amount should be divided by 12 to determine the monthly value. Incorrectly treating the entire $1,200 as monthly revenue would significantly overstate the MRR. The correct MRR from this annual payment is:
MRR= $1200/12= $100
Including Free or Trial Users
Including free or trial users in MRR calculations is a common mistake. Only paying customers should be included in the MRR calculation to ensure it accurately reflects the actual recurring revenue generated by the business.
Example:
If a SaaS company has 50 paying customers each contributing $100 per month and 20 users on a free trial, only the revenue from the paying customers should be included. Including the free trial, users would inflate the MRR inaccurately. The correct MRR is:
MRR=50 paying customers×$100=$5,000
MRR=50 paying customers×$100=$5,000
Difference Between ARR and MRR
Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR) are both key metrics for subscription-based businesses, but they differ in their timeframes and applications.
ARR: Measures the predictable, recurring revenue a company expects to receive annually from its subscription services. It provides a long-term view of a company’s financial health and growth potential.
MRR: Measures the predictable, recurring revenue a company expects to receive monthly from its subscription services. It offers a short-term view, useful for tracking immediate business performance and making quick adjustments.
MRR vs. Accounting Revenue
Monthly Recurring Revenue (MRR) and Accounting Revenue are two critical financial metrics that offer different insights into a company’s performance.
MRR:
- Forward-looking metric measuring recurring revenue from subscription-based products or services.
- Predictable and scalable revenue stream.
- Closely related to Customer Lifetime Value (CLTV).
Accounting Revenue:
- Backward-looking metric measuring total revenue earned over a specific period.
- Includes both recurring and non-recurring revenue sources.
- Historical and subject to fluctuations due to non-recurring revenue streams and seasonal factors.
Differences
MRR (Monthly Recurring Revenue) focuses exclusively on the predictable, recurring subscription revenue a business generates each month, excluding one-time sales and variable fees.
Accounting Revenue includes all sources of income, such as one-time sales, services, and any other non-recurring revenue streams.
Example:
Suppose a SaaS company earns $5,000 from monthly subscriptions (MRR) and an additional $2,000 from one-time setup fees and consulting services in a month.
- MRR: $5,000 (only the recurring subscription revenue)
- Accounting Revenue: $7,000 ($5,000 recurring + $2,000 one-time fees and services)
This distinction ensures that MRR reflects the steady, ongoing revenue while accounting revenue provides a comprehensive view of all income sources.
Frequently Asked Questions about MRR
What is Monthly Recurring Revenue (MRR)?
MRR is a financial metric that measures the predictable, recurring revenue a company expects to receive each month from its subscription-based services.
How is MRR calculated?
MRR is calculated by multiplying the total number of paying customers by the average revenue per user (ARPU) per month. For example, if a company has 100 customers paying $50 per month, the MRR would be $5,000.
Why is MRR important for subscription-based businesses?
MRR is crucial because it helps businesses forecast future revenue, identify growth trends, and make strategic decisions. It provides a stable and predictable revenue stream, essential for financial planning and investor appeal.
What are the different types of MRR?
The different types of MRR include New MRR (revenue from new customers), Expansion MRR (additional revenue from existing customers through upsells and add-ons), Contraction MRR (revenue lost due to downgrades), Churned MRR (revenue lost from cancellations), and Reactivation MRR (revenue from previously churned customers who re-subscribe).
What are common mistakes in calculating MRR?
Common mistakes include including one-time fees, incorrectly normalizing revenue from annual or quarterly payments, and including free or trial users in the calculations. These errors can lead to inaccurate MRR figures and misinformed business decisions.
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