Successful SaaS businesses track many different performance SaaS metrics.
But, if pressed to single out one number that indicates whether their business has traction and potential for growth, SaaS founders are likely to give the same answer: Monthly recurring revenue, or MRR.
It such a useful stat that marketing thought leader Neil Patel said:
“Monthly recurring revenue is the single most important metric that a SaaS business should be tracking.”Neil Patel, CrazyEgg
The single most important metric? That’s nothing to scoff at.
In this article, we’ll show you why that is the case, and we’ll also offer up ideas for how you can boost your own MRR.
So, what is MRR?
Monthly recurring revenue (MRR) is the average monthly earnings you generate from each of your paying subscribers, and therefore is a measure of your predictable revenue stream.
MRR forms the backbone of the entire SaaS business model. If you sell subscriptions that bring in monthly recurring revenue, you are rewarded with steady cash flow in perpetuity. Weirdly enough, it provides a sense of stability in what can otherwise be an unpredictable time for a business.
Because it reflects the revenue you expect to generate every month, monthly recurring revenue allows SaaS businesses to benchmark their progress, set growth goals, assess selling price trends, calculate customer lifetime value, and predict their revenue.
While there are a lot of types of monthly recurring revenue, what does it all amount to? And why should you care? Well, MRR is ultimately a number which takes into account all your different pricing plans, billing periods, sales and marketing fluctuations, new and lost customers, and normalizes them into a single figure. You can track this number over time to get a sense of how everything is performing.
Why is MRR important for SaaS businesses?
There are two major reasons that the best SaaS companies care so deeply about recurring revenue.
1. MRR allows you to predict future revenue
By measuring your revenue, you give yourself a simple and consistent way of tracking the money your subscription business generates each and every month. Knowledge of MRR allows you to prepare for the future because it’s an important part of figuring out much money you’ll have on hand to do things such as bringing on new hires or acquiring new businesses.
2. MRR indicates your growth trajectory
Any potential investor in your business will want to know your month over month growth in MRR. It’s become the metric du jour in Silicon Valley because high growth rate here is a strong indicator of a solid business that has product-market fit.
If customers are willing to pay for your service every month, that’s a good sign for a VC.
What types of MRR are available?
MRR can be broken down into the following five categories. You’ll want to measure them all separately in order to gain a holistic understanding of how you can improve your monthly recurring revenue. By understanding how and why your MRR is changing you can implement interventions that boost revenue and reduce churn.
New MRR is the money generated by brand new customers brought on during the month. If you bring on 20 new customers paying $30 a month during July, your New MRR for July is $600.
Expansion MRR is new MRR generated from upsells to your current customers. If you convinced 10 existing customers over the course of a month to switch from a basic plan to a premium plan, which costs $20 more, you generated $200 in expansion MRR.
Reactivation MRR is the monthly income you earn from reactivating customers who had previously churned or canceled. Reactivation MRR is an especially satisfying metric to track because it’s never easy to win back a lost customer.
For example, if you have 20 customers reactivate their accounts, and each pays $10 to do so, your MRR would increase by $200.
Contraction MRR is the monthly amount you lose from customers downgrading their accounts. For example, if you have 10 customers downgrade from a $50 plan to a $10 plan, your contraction MRR for the month is $400.
Churn MRR is the amount you lose each month from paying customers who cancel your service entirely. If you lose 100 customers who were each paying you $8 per month, your churn MRR is $800.
The goal is always to keep churn MRR and contraction MRR far below your new MRR and expansion MRR.
All in all, these numbers are informative on their own but even more powerful when looked at in combination with one another. For example, if you are losing a lot of MRR due to contraction, but your customer churn is fairly low, you can infer that you have a sticky product overall. You might look into experimentation with your pricing and features in order to boost MRR, rather than having a code-red situation where customers are fleeing your service.
How do you measure Net New MRR?
Given that monthly recurring revenue is going to change on a monthly basis based on the above factors, it’s important to have a metric that takes those fluctuations into account and reflects the net variation. This metric is called Net New MRR.
Calculate net new MRR with the following formula:
Net New MRR = New MRR + Expansion MRR – Churned MRR
Net New MRR gives you an accurate picture of your growth rate because it factors in the amount you are losing in MRR, not just how much you are adding.
Basically, if your New MRR + Expansion MRR is not greater than the MRR that churns each month, you’re losing money, and you’ll have to do everything in your power to turn things around quickly.
How to calculate MRR
To figure out your monthly recurring revenue, use the following formula:
Total paying users * average revenue per user
Imagine you run SaaS company that has 20,000 paying users. 15,000 of them pay for the basic version, which costs $5 per month. The other 5,000 pay for the premium version which costs $20 per month.
To calculate the MRR, you’d multiply the total paying number of customers (20,000) by the average revenue per user ($8.75) for a total MRR of $175,000.
How to increase your MRR
Now that we know what monthly recurring revenue is and why it’s important, let’s discuss measures you can take to boost this important number to unlock growth opportunities and impress your investors.
1. Charge more
There’s no better way to boost MRR than to simply charge more money for your services.
If you believe your product is truly valuable and saves your customers time and money, then you should not be afraid to try raising prices. Heed Warren Buffet’s advice on this one:
If you have to have a prayer session before raising your price by 10 percent, then you’ve got a terrible business.
Try boosting your prices to see how it affects conversion rates. You might be pleasantly surprised at the outcome.
2. Upsell your current customers
It’s much easier, and more profitable, to maintain and grow your current customer base than it is to gain new users. The more income you can generate from your existing user base, the better your monthly recurring revenue.
One way to upsell is through add-ons. When you create a new feature or service, rather than grandfathering customers into the plan, you can charge them extra for it. If you are confident that the feature is providing significant value, you should have no qualms about this.
3. Reduce your churn
Customer churn is the enemy of all SaaS businesses. It hinders growth and makes it hard to make enough money to invest in your product and your people.
Combat churn by:
- Surveying your users and implementing their feedback
- Personalizing every aspect of the user experience
- Providing fantastic customer service with modern tools, such as chatbots
- Making the onboarding process as smooth as possible
- Getting more customers to purchase annual contracts versus month to month
If you can keep churn under control, the sky’s the limit.
4. Move upmarket
The bigger the customer you sell to, the more you can charge for your services, the higher your MRR will be.
Plus, studies on SaaS churn show that higher revenue customers are significantly less likely to churn than their lower revenue counterparts.
It’s worth exploring whether your company has the ability to sell into some higher value accounts.
The bottom line
Revenue should not drive every decision you make. For instance, you should never maximize monthly recurring revenue at the expense of putting the customer first. That said, understanding recurring revenue and making every effort to boost your growth rate should be a major priority. A healthy and growing MRR is a sign, both to your employees and your investors, that you have a serious business that is built for the long term.