What is a Monthly Recurring Revenue in SaaS platform

4 Mins read

Monthly Recurring Revenue (MRR) is the basis of any SaaS platform, making it so attractive in the eyes of entrepreneurs. You do not need to worry about maintaining the required level of unit sales: all payments are made by customers automatically – in the form of a monthly subscription fee.

Cloud-based systems are an excellent investment protection for both customers and sellers. They help to avoid significant one-time investments in the purchase, installation and maintenance of licensed software, since all IT system management is on the shoulders of the developer and is included in the rental price. Sellers sleep well: while the client uses the service, his income is guaranteed.

However, this gold mine, this wonderful SaaS metric has some features that you should consider depending on the model of your business. Let’s consider them in more detail.

How to calculate MRR for saas platform ?

So, MRR is a regular income, reduced to some monthly value.

This indicator averages all your tariff plans and billing periods and reduces them to one total value, which allows you to track its changes over time. But how to calculate it correctly?

Suppose Buyer A has a monthly fee of $ 100 / month and Buyer B is $ 50 / month. The total MRR is $ 150, right?

This method of counting client-to-client is extremely inconvenient: as a rule, more than two clients use the service, their number is constantly changing, at times they can switch to another tariff or refuse services altogether, and each time you will have to manually recalculate MRR under the force.

Fortunately, there is an easier way.

All you have to do is multiply the total number of active customers by the average size of their regular payments, or ARPU (average monthly recurring revenue per user). For example, if 5 clients on average pay you $ 100 / month, then your MRR will be $ 500.

As for the annual and quarterly plans, they also need to be reduced to a monthly indicator. So, the annual subscription fee of $ 1200 should be recalculated as $ 100 / month (1200: 12 = 100), and the quarterly tariff, respectively, should be divided by 3.

Change accounting

With the growth of the SaaS-enterprise, the usual calculation of the current MRR becomes insufficient: for more accurate information about the state of the company, it is necessary to take into account all changes in this indicator. If it increased by $ 1000, then you would like to know how it happened, would you?

Here are 3 factors that affect your regular monthly income:

New MRR (New MRR) = additional MRR from new customers.

Advanced MRR (Expansion MRR) = additional MRR from existing customers (due to the transition to a more expensive tariff).

Lost MRR (Churned MRR) = MRR that you lost due to an outflow of customers (refusal of services or switching to a cheaper tariff).

Knowing all these 3 values, you can calculate the net new MRR, or Net New MRR:

Pure New MRR = New MRR + Advanced MRR – Lost MRR

In other words, if the lost regular monthly income, or churn, turned out to be greater than the new and expanded MRR at the same time, then this month your net new MRR will be negative, that is, the total regular monthly income will decrease by this amount.

Indicator Growth Source

One reliable way to keep your business growing is to expand your MRR, or increase profits from existing customers.

If you achieve that the extended regular monthly income covers your losses from user churn, then in fact you can not forget about this unpleasant indicator, which will be considered as negative churn. In this case, the outflow of users does not change your current MRR, and new customers become a constant source of additional income.

You can expand the MRR by switching customers to a more expensive tariff, for example, including additional options in the package or increasing the number of users (if you use the per-user calculation system).

MRR (Monthly Recurring Revenue) is the total monthly income received from your subscribers. ARR (Annual Recurring Revenue) – a similar indicator, but already an annual income. Keeping track of these two values ​​is useful for short and long term planning.

In particular, they help:

Track Product-Market Fit. After the launch of a new product on the market, MRR is the main compass for tracking the dynamics of business development. Assessing the increase / decrease of MRR, we can draw conclusions about the effectiveness of its promotion strategy and the success of the entire project.

Assess the effectiveness of the team of developers, sales people, technical support specialists. Even just to maintain MRR at a certain level, you need to constantly make efforts. Improve the product itself and customer service in order to keep users as long as possible. Constantly attract new customers to compensate for the outflow.

Tracking MRRs is a good way to make sure your team is doing its job.

Assess and predict the overall financial condition of the project. It is difficult to come up with a more convenient reference point.

Ways to optimize MRR

Expanding customer acquisition network. The most obvious way. The main thing is to monitor the ratio of income received from customers and the costs of attracting them.

Increase revenue from existing customers. Stimulate them to make full use of your product, to move to more expensive tariffs.

Customer retention work to increase LTV. It’s also logical: the longer the customer uses your product, the more money he will bring to you.

Lower customer acquisition costs (САС). Typically, in a SaaS business, these costs are already low. In addition, they are not directly taken into account when calculating MRR. Nevertheless, this is not a reason to neglect this optimization opportunity. Although indirectly, a decrease in CAC will favorably affect the growth of your income.