Monthly Recurring Revenue (MRR)

What is Monthly Recurring Revenue (MRR)?

Monthly Recurring Revenue measures the average amount of recurring revenue a business is set to receive each month. It’s a metric commonly used by subscription companies and SaaS companies to track the value of their current active customers.

What is recurring revenue?

Recurring revenue is any form of revenue that is set to repeat at regular intervals. Revenue gained from a monthly or annual subscription would be an example of recurring revenue. Recurring revenue does not include one-off purchases, and these should not be included in MRR.

Data Smarties: MRR and ARR

How to calculate MRR:

If your business only offers monthly subscriptions, you can simply calculate your MRR by taking all of your current active subscriptions and totalling the revenue they are due to provide over the next month.

However, if your business also offers subscription plans that exceed one month (i.e. quarterly or annual subscriptions) you need to calculate your MRR as follows:

Take the revenue your current subscriptions are set to generate over the next 12 month period, and divide this figure by 12.

Do not include one-off payments and purchases.

In instances where a customer has a payment plan that exceeds 12 months, you should similarly adjust their revenue down, to reflect a 1 month period. (e.g. if a customer pays $24,000 every 24 months, you should record $1,000 in MRR)

Common misunderstandings

Monthly Recurring Revenue (MRR) is not to be mistaken for a) Monthly Revenue or b) Projected Monthly Revenue.

• Monthly Revenue would typically refer to the revenue a business has actually generated over previous months. Whereas MRR describes the potential value of your current subscriptions. Monthly Revenue also includes one-off purchases not covered by MRR.
• Projected Monthly Revenue is a forecast of the actual revenue a business will generate over subsequent months. Typically it will incorporate multiple factors including Churn Rate, projected growth and the billing cycle. It will also include one-off purchases. Whereas MRR only measures the potential value of the subscriptions a business holds at that moment in time.

Pros:

MRR is a rolling figure, meaning you do not need to wait until the end of a fixed reporting cycle to report on business performance. It reflects every revenue change – as and when they happen, (from new subscribers to canceled subscriptions).

That’s why MRR is a popular metric for subscription companies – it gives a direct, up-to-date figure for the total value of your current subscriptions. This is helpful for tracking momentum – i.e. is the value of your subscriber-base growing or shrinking, and to what extent?

Cons

When used in isolation, MRR only gives a limited view of a business’ performance. It doesn’t actually indicate how much of that potential recurring revenue is likely to end up as cash in the bank. To calculate this you need to incorporate other metrics like Churn Rate.

MRR does not always behave in a consistent manner – indeed, MRR can vary a lot based on your billing cycle. For example, if all of your customers were due to renew their subscription on the same day of the year, (and a proportion of your customers always churn when their accounts come up for renewal) you would expect to see a significant drop in MRR on that one day.

Breaking down MRR

MRR is affected by many factors, including new customers, plan changes, price changes, and cancellations. In order to better understand why their MRR is changing, many businesses also track the following metrics:

• New MRR: total MRR gained from new customers
• Churn MRR: total MRR lost from customers who have canceled their subscription
• Expansion MRR: total MRR gained from existing customers (e.g. customers who upgrade their plan)
• Contraction MRR: total MRR lost from existing customers who have downgraded their plan
• Reactivations MRR: total MRR gained from old customers who have reactivated their subscription.

What’s the difference between Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)?

Apart from the fact that your Annual Recurring Revenue (ARR) will always be 12 times bigger than your Monthly Recurring Revenue (MRR), in practical terms there is no difference between these two metrics. They behave in the same way.

Generally, most businesses will choose to track one or the other. Which metric they track will likely depend on whether their business is more orientated around monthly subscriptions or annual subscriptions.