What is MRR and why is it so important in SaaS?
For most businesses, a record-breaking month is easy to see — there were lots of sales leading to a record-breaking month’s profit. As a SaaS company, however, it’s a little different.
The sustainability and success of your business are based on how much you consistently bring in every month. You might have a record-breaker in terms of profit for that month – with the win of a big-name customer, a sizeable professional services project, or a custom training package, for example.
But how much of that revenue can you predict getting again next month? That’s where your MRR measurement comes in. But what is MRR, what makes it so important, and how do you measure it?
What is MRR?
MRR is short for monthly recurring revenue. This is the revenue that you can reliably expect to receive at the end of each month.
Your monthly recurring revenue is not all the revenue you receive at the end of a month. Rather, it refers to the regular payments that come in every month. (Regardless of other, one-time sales or charges.) It’s the revenue you get from your subscriptions.
So, look at how much of your month’s intake is left after taking away the one-time payments, cancelling customers, and any non-repeatable usage charges. That’s your MRR.
What is MRR: calculating your monthly recurring revenue
Another way to answer the ‘what is MRR’ question is to look at how you calculate it. There are two ways to do this. The first is based on the average revenue per account; the second is on a customer-by-customer basis.
- Average revenue per user
Multiply the average amount of revenue you gain per customer per month by the number of paying customers you have.
For example: if each user contributes an average of £100 revenue per month, and you have 10 paying customers, your monthly recurring revenue would be £100 X 10 = £1,000.
- Customer-by-customer
Calculating your MRR on a customer-by-customer basis is more accurate, but also more long-winded. This is where you add up the total revenue per month received from each customer.
For example, customer 1 pays £250 per month, customer 2 pays £300 per month, and customer 3 pays £150 per month. The monthly recurring revenue from these customers would be £250 + £300 + £150 = £600.
Why MRR is important to SaaS
Another key part of the answer to the ‘what is MRR’ question is that it’s arguably the most important metric for subscription-based businesses. (Like typical SaaS models.)
With SaaS, you’re providing an ongoing service – not making a one-off sale. So, measuring success based on sales for the month doesn’t give a clear picture of how your software business is performing.
It’s difficult to keep track of new customers, upgrading customers and lost customers. Then there are the unpredictable factors affecting your revenue: a customer paying for a bespoke customisation; a company exceeding their usage allowance; a complex implementation taking months to test and deploy. As a result, getting a picture of your business growth can be messy and difficult. Enter MRR.
MRR and sustainability
The subscription model means your revenue and profits trickle in slowly. So, you need to measure your growth and revenue in a similar way. That’s where MRR is so useful. Keeping track of your monthly recurring revenue provides a baseline for you to measure your business growth and success.
Plus, it shows you the sustainability of your SaaS business model. Can you afford to compete in that time-consuming, intricate RFI process for a large brand? Can you take the loss if a complex trial complete with customisations and professional service work doesn’t come to fruition? It all depends on your MRR.
Having a clear idea of your monthly recurring revenue means you have a clear idea of how well your software is performing financially. You know what leaps you can afford to take; what you can and can’t commit to. In turn, this helps you predict future cash flows and set achievable goals. MRR also helps you identify success in a quiet month, and the long-term value of a busy month.
How to measure MRR
You’ve found the answer to the ‘what is MRR’ question, and you know why it’s important. But how do you measure it over time?
To measure the changes to your monthly recurring revenue, you need to not only calculate your current monthly recurring revenue, but also three other factors.
- New monthly revenue
As the name suggests, this is the monthly revenue coming from new customers gained over the month.
- Expanded monthly revenue
This refers to any new monthly revenue that comes from existing customers upgrading or adding new products to their subscription.
- Lost monthly revenue
It’s also important to calculate any loss of monthly revenue. For example, income lost due to customers cancelling or downgrading their subscription.
Once these are calculated, you add them together and can see how much your monthly revenue has grown. So, your MRR change is your base MRR + new MRR + expanded MRR – lost MRR. This is something you’ll want to do monthly, so you can get a complete view of your business growth.
Are you measuring yours?
Your monthly recurring revenue is the measurement of your success as a SaaS company. When you don’t keep track of it, it becomes increasingly difficult to identify the health of your service.
So, now you know the answer to the ‘what is MRR’ question, it’s time to get calculating, measuring and tracking.
