Product management glosary

Monthly Recurring Revenue (MRR)

What is Monthly Recurring Revenue (MRR)?

Monthly Recurring Revenue (MRR) is a critical metric for businesses that operate on a subscription-based model, such as Software as a Service (SaaS) companies, streaming services, and subscription box businesses. MRR measures the total predictable revenue a company can expect to receive from its customers on a monthly basis. This metric is essential for understanding the financial health of a subscription-based business, as it helps in forecasting revenue, setting targets, and making informed decisions about growth and expansion.

Why is MRR important?

For subscription-based businesses, MRR is a key performance indicator (KPI) that provides valuable insights into the company's financial health and growth potential. Some of the reasons why MRR is important include:

  • Revenue forecasting: MRR allows businesses to predict their future revenue, making it easier to plan for growth, allocate resources, and make informed decisions about the company's direction.
  • Customer retention: By tracking MRR, businesses can identify trends in customer retention and churn, allowing them to address potential issues and improve customer satisfaction.
  • Investor relations: Investors often look at MRR as a key indicator of a company's financial health and growth potential, making it an essential metric for attracting investment and maintaining investor confidence.
  • Benchmarking: MRR can be used to compare the performance of different products, business units, or even competitors, providing valuable insights into the company's competitive position in the market.

How to calculate MRR

There are several ways to calculate MRR, but the most common method involves multiplying the total number of paying customers by the average revenue per user (ARPU). The formula for calculating MRR is as follows:

MRR = Total number of paying customers × ARPU

For example, if a company has 1,000 paying customers and an ARPU of $50, the MRR would be $50,000.

It's important to note that MRR should only include revenue from recurring subscriptions and not one-time fees, such as setup fees or additional services. Additionally, MRR should be calculated using consistent billing periods (e.g., monthly or annually) to ensure accurate comparisons over time.

Types of MRR

There are several types of MRR that businesses can track to gain a deeper understanding of their revenue streams and customer behavior. Some common types of MRR include:

  • New MRR: This represents the revenue generated from new customers acquired during a specific period.
  • Expansion MRR: This represents the additional revenue generated from existing customers who have upgraded their subscription plans or purchased additional services.
  • Churn MRR: This represents the revenue lost due to customers canceling their subscriptions or downgrading their plans.
  • Net New MRR: This is calculated by subtracting churn MRR from the sum of new MRR and expansion MRR, providing a comprehensive view of the company's revenue growth.

Improving MRR

There are several strategies that businesses can employ to improve their MRR, including:

  • Reducing churn: By focusing on customer retention and reducing churn, businesses can maintain a higher MRR and improve their overall financial health.
  • Upselling and cross-selling: Encouraging existing customers to upgrade their plans or purchase additional services can increase expansion MRR and contribute to overall revenue growth.
  • Acquiring new customers: Implementing effective marketing and sales strategies to attract new customers can help increase new MRR and drive revenue growth.
  • Optimizing pricing: Regularly reviewing and adjusting pricing strategies can help businesses maximize their ARPU and improve MRR.

In conclusion, Monthly Recurring Revenue (MRR) is a crucial metric for subscription-based businesses, providing valuable insights into the company's financial health, growth potential, and customer behavior. By understanding and tracking MRR, businesses can make informed decisions about their growth strategies and ensure long-term success in the competitive subscription-based market.