Introduction
A company whose commercial business model is SaaS, based on the sale of monthly or annual subscriptions, should calculate its MRR. The MRR acronym is the contraction of the expression Monthly Recurring Revenue and refers to a key indicator for making budget forecasts, anticipating future turnover, and even borrowing from a specialized organization. In this guide section we will focus on MRR: how to calculate it, its advantages and its interest from a financial point of view.
MRR: practical definition
MRR is one of the KPIs to be monitored by SaaS companies, just like ARR or the churn rate. It allows a numerical basis of the monthly recurring turnover that a SaaS company can obtain depending on the purchase of its subscriptions by its customers over a month. MRR is a metric that can be influenced by all the services of a company: management, marketing, development, customer relationship, etc. In practice, SaaS service companies calculate their MRR in order to obtain forecasts on the income they can generate each month based on several factors:
- The number of new customers who have subscribed to a service.
- The number of loyal customers who continue their subscription or who opt for a premium package.
- The different subscriptions and rates offered by the company.
- The company’s billing system.
In addition, calculating MRR allows us to measure another indicator, Annual Recurring Revenue (ARR). It consists of the same numerical basis to obtain the potential amount of annual revenue of a company whose model is based on a SaaS service.
MRR calculation method
MRR takes into account the foreseeable and recurring elements that constitute SaaS company's activities (unlike calculating ARR). To this end, calculating MRR immediately excludes:
- Free trial versions of subscription discovery or limited-time options offered by the company.
- Company expenses, such as setup fees or unexpected bills.
- Regular or one-off expenses of the SaaS company.
It is also recommended not to include the potential value attributed to the prospect in calculating MRR, which would distort the indicators and constitute an error.
To calculate MRR, it is important to take into account other factors:
- Recurring revenue from the sale of subscriptions.
- Recurring revenue from regularly subscribed options.
- Recurring revenue generated by promotional offers that appear monthly.
There are two formulas for measuring monthly recurring income.
The first is the sum of all amounts received from the paying customers over the month.
The second is based on another KPI: ARPU, or the average revenue per user. We then multiply the average amount paid by each customer by the total number of customers paying a subscription.
Naturally, practice requires nuance when calculating MRR. Therefore, we should take into account fluctuations like:
- The monthly recurring revenue generated by new customers acquired during the month.
- The monthly recurring revenue generated by existing customers who switch to a premium offer.
- MRR reactivated by the return of a subscriber.
- MRR decreased due to the loss of revenue resulting from the departure of a customer or the switch to a reduced subscription.
- The loss due to the cancellation of subscriptions (the churn rate).
Thus, the calculation of the “net” MRR metric is obtained by the sum of all additional revenues from which the sums corresponding to monthly revenue losses will be deducted.
Benefits of tracking MRR
MRR is a key indicator that allows us to understand what revenue a SaaS business can potentially generate in a month. It is a tool that provides guidance for the commercial expansion of a company. Obtaining this figure allows a company to make decisions and strategic orientations that will better develop its turnover and guide the general expansion of its structure.
As a forecasting tool, it highlights the importance of retaining customers and allows us to consider customer retention strategies by developing the commercial model. In addition, calculating MRR is a very useful basis for a marketing strategy. It is also a viable metric to ensure a steady treasury, sufficient to cover the company’s monthly financial needs. It also allows to set realistic and truly achievable goals that fit perfectly into a SMART approach to its development.
Regular monitoring of MRR allows us to measure the growth of the company, to spot its stagnation or its loss of momentum. Be careful: to really use MRR as a guide to development, it is important to understand its fluctuations and link them to the factors that play a role in the development of the company. It can then be used as a management tool to better understand the performance of the customer acquisition strategy.
To make MRR a real development tool, it is important to use it in conjunction with other performance indicators such as the churn rate, Net promoter score (NPS) or Lifetime Value (LTV). Errors in calculating MRR can have serious consequences for investors and the orientation of development strategies. It is therefore preferable to entrust this process to professionals from a specialized firm.
MRR and financing plans
Calculating MRR allows us to gather a whole numeric argumentation that can convince investors or loan institutions specialized in FinTech and revenue based financing. This method is based on algorithms that analyze the SAAS Metrics of a company. With Silvr, this analysis allows to set the total amount of a loan and to adapt the amount of the monthly repayments according to the turnover obtained by the company. If the potential monthly turnover is sufficient, our specialists can provide companies requesting financing with a letter of intent and unlock funds within 48 hours.
