Definition

Monthly Recurring Revenue (MRR) is a financial metric that represents the predictable and recurring revenue a company expects to generate monthly from its subscription-based customer contracts. MRR is focusing exclusively on recurring revenue streams, such as subscriptions or recurring services, while excluding one-time payments or other non-recurring fees.

Importance of MRR

MRR –together with Annual Recurring Revenue (ARR)– is the cornerstone metric for businesses operating subscription-based models, often referred to as Software-as-a-Service (SaaS) companies. It provides insight into the company’s financial health and customer base, enabling decision-making for leadership, commercial teams, and investors. Here are some of the reasons why MRR is so essential:

• Revenue Predictability: Unlike one-time purchases, MRR providers a predictable view of future recurring income, essential for financial planning, budgeting, and raising capital.

• Investor Attraction: A growing MRR signals consistent and stable revenue streams, making the business attractive to investors, founders, and other stakeholders.

• Performance Benchmarking: Tracking MRR helps businesses measure their progress against businesses across industries and its direct competitors. Additionally, many SaaS companies encounter comparable challenges at certain stages of MRR, making it easier to compare with and connect with peers.

• Customer Retention: With MRR it's more important than any other revenue stream to build sustainable customer relationships. MRR and its growth reflect the effectiveness not only of customer acquisition, but also of customer success and retention strategies.

How to Calculate Monthly Recurring Revenue

The formula for calculating MRR is straightforward:

MRR = Number of Paying Customers x Average Revenue Per User (ARPU)

Alternatively, when businesses are tracking Annual Recurring Revenue (ARR) instead, the ARR can simply be calculated:

MRR = ARR / 12

Example Calculation:

1. If a SaaS company services 1,500 paying users and each user pays $20 per month:

   • MRR = 1,500 x $20 = $30,000 | The company’s monthly recurring revenue is $30,000.

   
   

2. For annual contracts, divide the Total Contract Value (TCV) by the number of months in the contract:

   • A customer with a $600 annual contract contributes $600 / 12 = $50 in monthly recurring revenue.

Components of MRR

MRR can be analyzed by its parts:

• New MRR: New revenue generated from new subscriptions during that period.

• Expansion MRR: Additional revenue generated from upsells or cross-sells with existing customers.

• Churned MRR: Revenue lost due to cancellations or downgrades in that period.

• Net Retention MRR: The revenue generated from existing customers in a specific period by accounting for expansions and churn.

Applications of MRR

MRR serves a ton of purposes for any SaaS company and its business functions:

1. Revenue Forecasting: It enables medium-term financial planning by providing a more stable view of future income streams than one-time purchases can offer.

2. Resource Allocation: Businesses use MRR to steer the organization and to prioritize investments in projects that sustain or grow recurring revenue (e.g. marketing investments or updating the onboarding experience).

3. Valuation Metrics: Investors rely on MRR and ARR to assess company valuation during fundraising rounds, potential acquisitions, or going public.

MRR vs Related Metrics

Monthly Recurring Revenue (MRR) differs from Annual Recurring Revenue (ARR):

• ARR provides a view of annualized revenue.

• MRR focuses on monthly revenue trends.

Generally, you see MRR being applied more often in consumer facing products and ARR with business-to-business solutions. This is mainly due to the fact that consumers often opt in for a monthly recurring contract, while businesses close annual contract.

Conclusion: Why Is MRR Important?

MRR (or ARR) is the single most revealing metric for a SaaS company's revenue streams and its ability to grow and monetize its customer base. In combination with metrics such as Average Contract Value (ACV), the Customer Churn Rate (CCR), and the Net Revenue Retention (NRR) you can quickly asses any SaaS business. By consistently tracking your MRR, you can refine your customer acquisition and expansion strategies, the pricing strategy, and scale operations effectively.