MRR is a business metric that gets tossed around a lot. Let’s dive into it a bit more and go over just how important it is for SaaS businesses.
What is MRR?
MRR stands for Monthly Recurring Revenue. It is the monthly value of the recurring elements of your contract.. It will typically exclude one-time and variable fees, but for month-to-month businesses, it could include such items.
What is MRR in SaaS?
For c-suite execs and for organizations that adopt Monthly Recurring Revenue as a core operating and board-level metric, Monthly Recurring Revenue is probably the most important SaaS metric of all.
To answer the question “what is MRR in software?”, looking at the type of business model SaaS companies usually utilize is essential. Most SaaS companies work on a subscription-based business model, and MRR is, first and foremost, a metric essential to subscription-based businesses. MRR helps SaaS companies report on recurring revenue performance across dissimilar subscription terms.
What is important about the MRR SaaS metric also answers the question of “what does MRR include?”, as MRR is not a single number per se, but rather the momentum around the different factors that define your company’s MRR:
- Reactivation MRR: The amount of MRR gained from winning back previously lost customers.
- Churn MRR: The amount of revenue your company loses from subscription cancellations from month to month.
- Expansion MRR: Contract upsells, cross-sells, and add-ons.
- New MRR: MRR generated from net new business
- Upgrade MRR: Similar to but different from Expansion MRR, this MRR SaaS metric is a measure of the revenue generated from the subscription plans that have moved up from their original pricings to higher-cost plans.
There is no specific definition for the MRR SaaS metric. In fact, there can be significant confusion over the term itself and measurement of Monthly Recurring Revenue because it feels and sounds like “revenue” in the context of revenue recognition. However, MRR is not recognized revenue and is calculated very differently, which can cause confusion and turmoil in the finance department, the group typically tasked with calculating and reporting the MRR metric.
It will be up to your organization to determine which of these MRR elements factor into your overall Monthly Recurring Revenue based on whatt your business thinks ismost representative of the business.
How to Calculate MRR
Because MRR is the normalization of the recurring revenue of elements of a contract to one month, your MRR calculation must take into account various considerations such as:
- Number of days in a given month
- Length of contract
- Mid-term contract changes and early renewals/upgrades
For this reason, MRR is best calculated at the contract level.
MRR cannot simply be computed as Number of Customer * Average Monthly Revenue Per Customer and expected to be used in any meaningful way in your business.
Check out this article for more guidance on how to calculate MRR in your term subscription business.
If this all becomes a little too complicated as your business grows and your subscriptions become varied, contact us here at SaaSOptics for a free demo of our subscription management platform to keep them all straight so your SaaS metrics are flawless.