MRR Definition for SaaS
What is MRR?
MRR is an acronym for Monthly Recurring Revenue, which is the contracted, committed, or predicable revenue stream.
MRR Metric for Monthly Subscription Business
For a monthly subscription business, MRR is an arrears measure of the subscription revenue for the previous month. Since there are no real industry standards that define how you calculate MRR, you are free to define the sales items that are included.
Base level and fixed fees are almost always included. Variable, usage, or consumption fees are sometimes included, but usually only when you can make a strong statistical case that the revenue stream is predictable or consistent. If you include variable or consumption fees, you should report them on distinct line items as some might argue they should not be included at all.
MRR Metric for Term Subscription Business
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 revenue in each month the subscription 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 total MRR multiplied by the number of 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.
Since financial software is normally designed in compliance with generally accepted accounting practices, it is uncommon to find MRR as a field or function in a GL or finance system. While that is a significant change for most, the biggest challenge in reporting MRR related metrics is typically in measuring the cancellations. Many finance systems, especially tools like QuickBooks and other packaged finance software, do not include a contract object. Most organizations turn to spreadsheets to track contracts to measure cancellations.
Objectively, a cancellation is the equivalent of the absence of a Renewal. However, measuring a cancellation using an "absence of data" is extremely difficult, especially in a spreadsheet. In other words, you need some form of a cancellation data element that you can clearly record and measure.
The best practice approach is creating cancellation records is to record the cancellation in the same period as you would record it as 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
How to Calculate Monthly Recurring Revenue - Monthly Subscriptions
How to Calculate Monthly Recurring Revenue - Term Subscriptions
Monthly Recurring Revenue
Annual Recurring Revenue
Bessemer MRR Growth
THE ENCYCLOPEDIA OF SUBSCRIPTION & SAAS FINANCE TERMS AND METRICS
Definitions, examples, explanations, discussions and more…