What is MRR in Business: Definition, Types & Ways to Increase It?

What is MRR in business

Increasing revenue over time is in the interest of any business. However, the growth of a SaaS business depends heavily on consistent monthly or annual subscriptions, which is a prime reason why companies track monthly recurring revenue (MRR). 

In this post, we’ll go over what is MRR in business, how to measure it properly, how to increase it, but also other things you should know such as common mistakes and benefits of tracking this vital metric.

Let’s start with the definition of MRR. 

What is Monthly Recurring Revenue?

MRR stands for monthly recurring revenue, which is a crucial metric in SaaS that businesses use to calculate the recurring and predictable revenue gained from subscriptions. MRR refers to the total revenue you generated in the specific month, including all the additional fees and services. SaaS businesses use it to assess growth on a monthly basis and the impact of modifications in pricing on subscription plans

Just as monthly recurring revenue in SaaS shows the revenue you get on a monthly basis, annual recurring revenue shows the one you generated over a period of twelve months. Both metrics are vital for SaaS as they provide useful insights into revenue dynamics. 

Besides understanding what MRR means and how it differs from ARR, it is crucial to understand different types of MRR to be able to calculate the ones that are crucial for your business.

Different Types of MRR 

What is MRR in business and why is it important? Besides providing you with insights into your company’s revenue dynamics and customer retention efforts, it also helps you forecast future revenue and make better decisions for driving growth and sustainability. 

There are different MRRs for SaaS that companies track to evaluate the revenue streams and understand the potential for growth. We’ll provide crucial MRR formulas in a bit, but first, let’s see the most common and important ones:

  1. Upgrade MRR 
    • Upgrade monthly recurring revenue represents the additional revenue from existing customers who upgraded their subscription plans. 
  2. Downgrade MRR
    • Downgrade monthly recurring revenue shows the reduction in revenue that happens when existing customers downgrade their subscription plans. 
  3. Expansion MRR
    • Expansion MRR shows the total revenue from existing customers who upgrade their subscriptions, purchase new features or increase their usage. 
  4. Reactivation MRR
    • Reactivation monthly recurring revenue shows the revenue you get from customers who had churned but decided to stay and reactivated their subscriptions. 
  5. Contraction MRR
    • Contraction monthly recurring revenue represents the revenue you lost from existing customers who downgraded their subscriptions, removed features, or stopped using them. It is a component of Net New Revenue which we will cover in a bit. 
  6. Churn MRR
    • Churn monthly recurring revenue shows the revenue you lost from customers who canceled their subscriptions and stopped using the software.
  7. New MRR
    • New monthly recurring revenue shows the total revenue you get from new customers or subscriptions within a specific time frame.  
  8. Net New MRR
    • Net new monthly recurring revenue shows the increase in monthly recurring revenue for new customers and existing customers who upgraded their subscriptions, excluding the MRR lost from churn and downgrades. 

SaaS Metrics Required for Tracking MRR

Besides understanding the meaning of MRR, you should know how to calculate MRR to get insights that can help you create effective customer retention strategies.

We already mentioned several ones, but let’s see other MRR metrics that are important to track in SaaS:

  • Average Revenue Per Account (ARPA)
    • ARPA shows the average revenue generated from a certain customer subscription or account over a certain month. 
  • Customer Lifetime Value (CLTV)
    • CLTV represents the expected revenue from a customer over their entire relationship with your company.
  • Customer Acquisition Cost (CAC)
    • CAC shows the total cost needed to acquire new customers, including marketing and sales expenses. 
  • Total MRR
    • Total monthly recurring revenue is one of the most important recurring revenue metrics as it represents the sum of revenue generated from all monthly subscriptions, including expansion, new, reactivation and existing customers’ revenue and is the best evaluation of the overall MRR growth rate. 
  • Net MRR
    • Net monthly recurring revenue represents the change in MRR from expansion, new, churned and contraction sources. 

Now, let’s see the MRR calculation for the crucial MRR metrics we mentioned above:

New MRR:

New MRR = MRR at the end of the period – MRR at the beginning of the period + Expansion MRR

New Monthly recurring revenue formula
New Monthly recurring revenue formula

Churn MRR

Churn MRR = MRR at the beginning of the period x Churn Rate

Churn Monthly recurring revenue formula
Churn Monthly recurring revenue formula

Expansion MRR

Expansion MRR = MRR at the end of the period – MTT at the beginning of the period – New MRR – Reactivation MRR

Expansion Monthly recurring revenue formula
Expansion Monthly recurring revenue formula

How to Calculate Monthly Recurring Revenue?

After learning about the MRR definition, let’s go through a few steps about how calculating MRR works:

  1. Gather all your data
    • When calculating MRR, it is vital to collect all your customer data so that you can properly determine the revenue obtained from their subscription plans. Also, collect data on sales transactions for the month and put them in a spreadsheet where each column represents a separate customer. You can include their account ID or other significant identifiers in the first column, while the second is reserved for their subscription value. 
    • Don’t forget to divide the contract value by the number of months. 
  2. Sum up MRR
    • Once you get all the data, simply sum up all the subscription columns. 
  3. Divide customers into different segments
    • To get a deeper understanding of MRR, you should perform customer segmentation and divide customer cohorts based on pricing plans and other important factors. With a customer success platform like Akita, you can perform customer segmentation easily and you can have all your customer data in one place.
  4. Calculate MRR
Monthly recurring revenue MRR formula
Monthly recurring revenue MRR formula

How to Increase MRR: Tips You Should Know

Increasing MRR is a main goal for any SaaS business, as it directly impacts business growth, profitability and sustainability

As MRR is important for all business departments, let’s go over a few questions before we show you how to increase MRR. 

So, what is MRR in sales and how can sales teams benefit from it? MRR helps sales teams understand the value of a certain customer relationship and evaluate the effect of their current sales efforts on revenue growth. 

How about marketing, what is MRR in marketing? In marketing, MRR is used to track the effectiveness of different marketing campaigns related to customer retention and acquisition. For example, by tracking MRR obtained from leads, marketing teams can assess which source was the most efficient and use it more frequently. 

Now, let’s see how to effectively increase MRR:

  1. Review existing MRR sources 
    • Analyze current MRR by reviewing data related to new customers, expansions, or upgrades, to identify areas for improvement. 
  2. Understand customer needs
    • By having an in-depth understanding of customer needs and challenges, you can better create offerings and pricing plans. 
  3. Offer different pricing tiers
    • Optimize your pricing strategy so that it aligns with the value you provide. 
  4. Invest in customer success
    • Customer success is a backbone of any SaaS business. Therefore, offer proactive support and professional onboarding assistance to drive more customer engagement and retention. 
  5. Improve your product
    • Make sure to continuously improve your product based on customer feedback and market trends. 
  6. Offer annual subscriptions
    • Motivate customers to switch to annual subscriptions by offering them discounts and incentives. 

Top Mistakes People Make While Calculating MMR

Although calculating MRR might seem easy when using the right formula, there are several common mistakes that companies often make.

First and foremost, you should not include non-recurring revenue as MRR is revenue that is predictable and recurring, excluding refunds and one-time fees. Some don’t track changes in subscription plans, like cancellations or upgrades – both can lead to inaccurate MRR calculation. 

There’s also a mistake of not verifying the customer data related to subscription plans should be inputted and interpreted correctly so that the end calculation is correct. And lastly, some make a mistake of calculating MRR once, but it should be calculated regularly to track changes over time with accuracy. If not, the result can show outdated and incorrect monthly revenue figures. 

Benefits of Tracking MRR

Tracking MRR regularly can help you make better decisions backed by valuable data. Let’s see the greatest benefits of tracking MRR in SaaS:

MRR provides you with a consistent metric for tracking the performance and growth of your business. When you monitor the changes in MRR frequently, you can evaluate the efficiency of sales and marketing efforts, customer retention strategies and the impact of product changes. 

When you understand your recurring revenue dynamics, you can make better decisions about investments, resource allocation and other expenses. And also, when you take time to analyze patterns in churn rates, MRR growth, and expansion revenue, you can make predictive predictions about future revenue dynamics.

Conclusion

So, what is MRR in business? MRR is a crucial metric for any business, especially in SaaS, which survives on monthly subscriptions. It represents the predictable and recurring revenue gained from subscriptions on a monthly basis

Understanding different MRR types, like new MRR, expansion MRR, or churn MRR, is imperative for monitoring revenue dynamics, evaluating MRR growth, and making better decisions based on precise data. 

Frequently Asked Questions

What is a good MRR rate?

A good MRR can vary depending on several factors, like business size or stage, but a healthy MRR rate for SaaS would be somewhere between 10 and 20% per month.

Why is MRR important? 

MRR provides insights into revenue performance, customer relationships, and growth potential. Above all, MRR can help you identify trends in customer churn and take effective measures to improve customer retention.

How is MRR calculated?

MRR can be calculated by summing up all recurring revenue sources for the month.

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