MRR Definition: SaaS Metrics
What is MRR & how is it used in SaaS?

MRR Definition for SaaS

What is MRR?

MRR means Monthly Recurring Revenue, which is the contracted, committed, or predicable revenue stream.

For a monthly subscription business, MRR is an arrears measure of the subscription revenue for the previous month. Since there are no standards, you are free to define the sales items that are included. Base or fixed fees are always included. Variable or consumption fees are sometimes included, but usually only when the revenue stream is predictable or consistent. If you include variable or consumption fees, you should segment them into on for more distinct line items.

For a term subscription business, MRR is a normalized revenue estimate of monthly revenue. For a term business, MRR is not typically "reportable revenue," rather an estimate of the monthly normalized value of the agreement in each month the agreement spans. For instance, a one year term agreement with a total subscription amount of $1,200 with a start date of Feb 16, 2011 and an end date of Feb 15, 2013 would have a MRR value of $100 in EACH of the 13 months in which the term is active. In this example you can plainly see the actual revenue of $1,200 does not equal the MRR * months, which is $1,300. This concept can be a significant organizational or cultural issue for people and companies as the finance team is used to numbers tying up. Alternative approaches and philosophies would be to include the $100 only in Feb 2012 or only in Feb 2013.

In addition to creating the simple MRR normalized amount for each month of the subscription, the biggest challenge in measuring MRR is typically around measuring the cancellations. Many finance systems, especially tools like QuickBooks and other packaged finance software, do not include a contract object and have no knowledge of revenue streams. Most organizations turn to spreadsheets to track contracts and to attempt to measure cancellations.

However, measuring a cancellation using the "absence of data" is extremely difficult in a spreadsheet. In other words, you need some form of a cancellation data element that you can clearly record and measure. As part of the definition of how you record the cancellation, rules are included about the timing of the cancellation. The best practices approach is to record the cancellation in the same period as you would record it if it were a renewal. Doing so enables you to accurately measure churn. By way of illustration:

An agreement ends on July 31. If it renews, the start date of the new term is August 1 and therefor the renewal date for MRR calculations is August 1. If it doesn't renew, i.e. it cancels, you should record the cancellation on August 1 not July 31.

A common format for MRR reporting includes MRR by segment, including New, Renewals, Upgrades, Downgrades, etc. as shown in this standard MRR Momentum Report included in SaaSOptics