In the past decade, subscriptions have become the go-to business model for software companies.
There are obvious benefits to this arrangement. Having customers stick around and make repeat payments for years — rather than one-off purchases — makes revenue more predictable for the company’s finance department. But it also requires companies to pay close attention to several data points, including how many customers sign up, start paying, upgrade, downgrade or churn.
An important metric subscription companies use to track the health and growth of their businesses is called monthly recurring revenue, or MRR.
What Is Monthly Recurring Revenue (MRR)?
“MRR is really important because it gives you a view into the health of your business,” Anya Klots Benbarak, chief revenue officer at HoneyBook, told Built In.
Here’s how to calculate it.
How to Calculate MRR
The basic calculation for MRR is pretty straightforward. Just add up how much you charge all your subscribers each month. (If any of your customers pay on a quarterly or annual basis, be sure to spread those payments out across three or 12 months, respectively.)
Another way to express that:
MRR = (number of customers) x (average monthly recurring bill)
For example, in January, Bossy Biz has 10,000 subscribers. Each one pays an average of $15 per month.
Since 10,000 x 15 = 150,000, Bossy Biz’s MRR is $150,000.
Simple, right? But spreadsheets will rarely ever look this tidy. Businesses will also want to consider:
- New MRR: MRR gained from newly acquired customers.
- Upgrade MRR: MRR gained from existing customers who upgrade to higher-priced subscriptions.
- Downgrade MRR: MRR lost due to customer who downgrade to lower-priced subscriptions.
- Churn MRR: MRR lost to due to customers who cancel.
Suppose Bossy Biz adds 2,000 new subscribers in February (each paying $15 per month on average).
2,000 x 15 = 30,000
Bossy Biz’s New MRR is $30,000.
Let’s say that, also in February, 500 existing subscribers upgrade to a premium subscription plan that costs an average of $10 more than the basic subscription plan they were previously paying for.
500 x 10 = 5,000
Bossy Biz’s Upgrade MRR is $5,000.
Other customers aren’t so happy with the Bossy Biz’s premium offerings, though.
In February, 100 existing customers decide to downgrade from the premium plan to the basic one. Let’s say the company loses an average of $10 per customer due to downgrades.
100 x 10 = 1,000
Bossy Biz’s Downgrade MRR is $1,000.
Sadly, 500 Bossy Biz customers (who previously paid an average of $15 a month, let’s say) just went out the door completely and canceled their accounts.
500 x 15 = 7,500
Bossy Biz’s Churn MRR is $7,500.
Putting it all together, Existing MRR (150,000) + New MRR (30,000) + Upgrade MRR (5,000) - Downgrade MRR (1,000) - Churn MRR (7,5000) = 176,500
Bossy Biz’s Net MRR in February is $176,500.
Net MRR Growth Rate
If a Bossy Biz wants to see how much its MRR grew from month to month, it might look at Net MRR Growth Rate.
Suppose Bossy Biz’s Net MRR in January was $150,000 and its Net MRR in February is $176,500.
Net MRR Growth Rate is found like this: Subtract this month’s Net MRR from last month’s Net MRR; then, divide that number by last month’s Net MRR; finally, multiply all of that by 100 so you get a percentage.
[(176,500 - 150,000) / (150,000)] x 100 = 17.7
Bossy Biz’s Net MRR Growth Rate is 17.7 percent. Not bad!
Why Track MRR?
Offering monthly subscriptions has become commonplace for many companies — especially B2B SaaS businesses.
Why, though? Isn’t it better to lock in customers for annual or multi-year contracts?
Lots of young SaaS companies offer monthly subscriptions because they are still trying to develop product market fit.
Products that are priced with monthly subscription plans are low enough of a risk that many customers try them out. Even if they eventually churn, they still often provide valuable product feedback to the company.
“More often than not, at an earlier-stage company, when you’re just trying to develop product-market fit, you don’t care about the contract value, you don’t care about the contract length, you just care that someone’s giving you money,” Paul Hlatky, vice president of revenue at Blissfully, told Built In. “And they’re giving you daily feedback on what you can do to service them better.”
For monthly billings, MRR is a natural metric to focus on.
What About Annual Recurring Revenue (ARR)?
Businesses that monitor MRR will track ARR too. You don’t have to choose between one or the other.
But companies that only offer annual or multi-year contracts tend to gravitate toward discussing ARR as the main KPI. In these cases, ARR provides an easier snapshot of the health of the business.
These types of businesses, in Hlatky’s experience, are often at a more mature stage, and specialize in enterprise software, which tend to have a more complex implementation process. For that reason, customers like to invest in using that product for years at a time.
The growth and finance teams at any tech company will likely want to keep close watch on both MRR and ARR — as well as several other metrics and leading indicators, such as profit, product usage, customer lifetime value (LTV) and customer acquisition cost (CAC).
“I think the reason MRR is exciting is because it was kind of this new thing where it’s not about your contract value at signature. It’s actually the fact that it’s recurring every month,” Honeybook’s Anya Klots Benbarak said.
“But if you only look at that, you’re missing other leading indicators for your revenue health and your customer base and the value of your product. I think it needs to be a suite of metrics that you track.”