Most people know that having good products or services and marketing them well is important to running a successful business. But it’s equally important to keep an eye on your financial metrics because you are what you measure.
One of the most important metrics in the subscription business is Monthly Recurring Revenue (MRR).
In a subscription business, you will always have new customers signing up and some existing customers churning out. This causes constant fluctuation in your revenue. MRR captures this movement to show whether your revenue is growing or shrinking, and by what percentage.
A regular monthly revenue calculation doesn’t consider annual subscriptions and subscription plan changes, so it gives a misleading impression of your business’s financial health. In addition to showing your current conditions, MRR makes it easier to accurately forecast future revenue so you can make educated decisions about budgeting, investing, and scaling.
Monthly Recurring Revenue (MRR) – Definition, Calculation & Types
Monthly Recurring Revenue (MRR) is the predictable total revenue generated by your business from all the active subscriptions in a particular month. It includes recurring charges from discounts, coupons, and recurring add-ons, but excludes one-time fees.
With MRR you can assess the present financial health of the business and project the future earnings based on the active subscriptions.
How to calculate MRR?
Calculating MRR is simple. Just multiply the number of monthly subscribers by the average revenue per user (ARPU).
MRR = Number of subscribers under a monthly plan * ARPU
For instance, suppose you have 5 subscribers on the $300/month plan. The MRR will be:
(5* $300) = $1500
For subscriptions under annual plans, MRR is calculated by dividing the annual plan price by 12 and then multiplying the result by the number of customers on the annual plan.
For instance, if a customer subscribes to your product with a monthly renewal agreement for $500 per month, the ARR would be, $500 * 12 = $6000
What are the different types of MRR?
MRR establishes a correlation between the customers and their accounts, shedding light on their subscription behavior. A rise in MRR indicates there is an increase in customer acquisition, plan upgrades, or both. A fall in MRR signifies increased downgrades, cancellations, and churn. To understand the specific reasons behind the rise and fall of MRR, you’ll need to separately track the different factors that impact this metric. When you break down the MRR into more specific types, each type offers distinctive insights into revenue, customer behavior, and business health.
New MRR is the additional revenue generated from the new customers gained during a month.
For instance, if your business gains 5 new subscriptions under the $500/month plan, then the New MRR will be 5 * $500 = $2500
Upgrade MRR is the amount of additional revenue generated from subscriptions that move from existing pricing plans to higher plans over a specific month. The add-ons associated with the subscriptions are also taken into account while calculating Upgrade MRR.
For instance, if an existing customer who subscribed to a basic plan of $50/month moves to a standard plan of $200/month and purchases an add-on for $25/month, then the upgrade MRR will be $200 – $50 + $25= $175.
Downgrade MRR is the reduced revenue from subscriptions that have moved from their existing plan to a lower plan over a specific month.
For instance, if a customer downgraded their subscription from a higher plan for $500 to a basic plan for $100, then the Downgrade MRR will be $500 – $100 = $400.
Expansion MRR is the additional revenue gained from existing customers in a given month compared to the previous month. The additional revenue in Expansion MRR is generated through add-ons, upselling, and cross-selling. Positive Expansion MRR indicates that you were able to retain your customers by gaining their satisfaction and loyalty. This is great for your bottom line because there is no Customer Acquisition Cost (CAC) involved in these sales to existing customers.
You can also calculate the rate of growth in expansion MRR for a month:
(Expansion MRR in that month / Total MRR at the beginning of the month) * 100
For instance, let’s say your business has MRR of $800K at the beginning of the month, and throughout the month it gained an additional revenue of $17k of Expansion MRR from its existing customers (via add-ons, up-sells, and cross-sells).
Then the Expansion MRR growth rate per month is:
($17K / $800K) * 100 = 2.1%
Reactivation MRR is the monthly revenue generated by previously churned customers returning to a paid plan. It indicates the profit gained by winning back lost customers.
For instance, if 5 of your churned customers reactivated their accounts in the same month and each of them subscribed to a $50/month plan, then your Reactivation MRR for the month is $250.
Contraction MRR is the amount your business loses due to subscription cancellations and downgrades during a particular month. You will have Contraction MRR if a customer cancels their subscription, downgrades to a lower-priced plan, pauses their subscription, uses credits, is given a discount, or stops a recurring add-on. Some Contraction MRR is due to downgrades, but because other factors contribute to contraction MRR, it’s different from downgrade MRR.
For instance, suppose you have decided to reward 50 of your long-standing customers by offering them a discount of $30 for a specific month. Your Contraction MRR will be 50 * $30 = $150.
Churn MRR is the total amount your business loses due to subscription cancellations over a specific month.
For instance, if 3 of your customers who were each paying $1000/month cancel their subscriptions in the same month, then your churn MRR for the month is $3,000.
Net New MRR
Net New MRR highlights how much your revenue has grown (or shrunk) in the present month compared to the previous month. You can calculate Net New MRR using this formula:
Net New MRR= New MRR + Expansion MRR – Churned MRR.
If your Net New MRR is negative (meaning the sum of your New MRR and Expansion MRR is less than the Churn MRR), it means you have lost revenue. If the Net New MRR is positive, then you have gained revenue.
Suppose during a month 5 new customers subscribed to your service, each paying $100/month. Meanwhile, 10 current customers upgraded from $100/month to a higher-tier plan for $200/month. But 3 of your customers who were each paying $200/month churned out.
Now your Net New MRR for that month would be $500 + $1000 – $600 = $900.
Why is tracking MRR important for your business?
By giving an accurate picture of how much revenue potential your business has, MRR provides insights that help you decide what leaps you can take to grow your business. Let’s see what else MRR can help with that makes it a key subscription metric.
A month is considered a reasonable period to measure a subscription business’ growth. A week is too short, and a year is too long to wait to check on how the business is doing. Besides, in the subscription model, the revenue for a given customer trickles in by small amounts every month, unlike one-off sales where full payment is made at the time of purchase. So you need to measure your business performance similarly, ensuring that you will have a steady cash flow every month, to build a sustainable business. That’s where MRR is useful. It keeps track of the month-over-month trends and provides near-term insights on the financial performance of your business, which help you determine how you’re progressing toward the year’s revenue quota. You can also look back at the year to help set realistic future goals and use your finances to attain them.
MRR is considered essential for making accurate sales projections and planning for both short-term and long-term business growth. By analyzing your monthly financial performance, you can anticipate the next month’s revenue and decide what changes you need to make in your sales efforts to increase revenue.
For instance, suppose the MRR of your business is $90,000 in March. Based on this, you can assume that you will make sales worth $90,000 or more in April. You can refine this forecast by applying the historical growth rate. If your sales increase by 6-8% each month consistently, a standard sales estimate for April would be $94,800.
MRR predicts the revenue that flows into the business every month. Matching this revenue with the company’s expenses gives you an accurate picture of the resources you will have at your disposal to reinvest in the business. This is how MRR helps you make reliable decisions and confidently budget for business expansion. Apart from this, MRR projections also help you identify the areas where you need to increase your spending and where you can cut back.
For example, if your MRR has increased this month compared to last month but your New MRR is on the decline, you can deduce that existing customers are happy with your product but not enough new ones are discovering your business. So you will want to allocate more of your resources to lead generation campaigns.
The right metrics tell how well a business is doing and provide actionable insights for growth. MRR is one of these important metrics for any subscription business. It’s key to getting a real-time financial picture of your business and making workable plans for expansion.
That said, in Zoho Subscriptions, we have created a free tool that enables you to forecast MRR. You just have to enter the current MRR, churn rate, MRR growth rate, and projection time in months. Try it out to see how much and how fast your business will grow in the future.