To ensure successful future growth and attract new customers, businesses devise specific growth and marketing plans. However, executing these plans effectively requires a thorough understanding of the average revenue the company generates.
Tracking monthly recurring revenue (MRR) is crucial for subscription-based or SaaS businesses. In this article, we’ll explore MRR in-depth, covering its definition, calculation methods, and strategies for increasing it.
What Is Monthly Recurring Revenue (MRR)?
Monthly recurring revenue, or MRR, is the expected total income your business earns from all active subscriptions during a specific month.
MRR does not include one-time fees, only recurring expenses from promotions, vouchers, or specific add-ons. This type of revenue is typically tracked by businesses that sell monthly subscriptions regarding their products or services.
The MRR metric allows companies to combine many pricing strategies and billing cycles into a single, dependable statistic that they can use to monitor trends over time.
Companies use MRR to track the revenue they bring in each month, predict future profits, and create marketing and business plans accordingly.
Key Takeaways
Monthly recurring revenue is a consistent sum of money that a business expects to make from its customers every month;
Analyzing your monthly recurring revenue helps to keep track of the progress achieved towards certain goals. Also, it helps in estimating the long-term growth potential of your organization or company;
Creating new upsell opportunities is one strategy that may be applied to increase monthly recurring revenue, but new value should always be added to the offer.
How to Define Monthly Recurring Revenue (MRR)?
MRR is a metric that creates a link between the client accounts and the clients themselves, by clarifying the customers’ subscription practices. Calculating your monthly recurring revenue is relatively simple.
Just multiply your total number of customers by the average revenue per account (ARPA). The calculation can be visualized with the following formula:
TC (total customers) * ARPA = MRR
If your ARPA amounts to 5$ per month from each customer and your business has 500 customers on average, then your MRR would be 5 * 500 = 2500$.
There are also five main types of MRR to keep in mind.
- New MRR – MRR from each new customer.
- Expansion MRR – MRR from your current customers.
- Reactivation MRR – MRR from past clients.
- Contraction MRR – Lost MRR from current clients.
- Churned MRR – Lost MRR from customers who canceled their subscriptions.
While net new MRR may seem like the most important type of MRR for growth, expansion MRR and churned MRR also play a valuable role. Expansion MRR helps to solidify the MRR growth rate of a company, while churned MRR is the limiting factor that businesses seek to minimize.
Why Is Monthly Recurring Revenue (MRR) Important?
Tracking your monthly recurring revenue is a vital part of staying on top of company profitability. Making any kind of plan requires insights into MRR to adjust the growth plans or strategies in question to the expected budget.
MRR ensures long-term sustainability
The monthly recurring revenue business model is in stark contrast with traditional sales and company practices. Usually, the focus is on creating a one-time sale of a product or service, but this may not be the most conducive strategy for long-term growth.
Monthly recurring revenue promotes a lasting relationship between the company and its customers, and it ensures a steady supply of predictable income.
A subscription or SaaS company may effectively track its performance by analyzing its monthly recurring revenue. This is how the best decisions can be formulated, and future growth is successfully pre-planned.
Performance monitoring and business health
MRR serves as a key performance indicator (KPI) for monitoring the health and performance of a business, especially for subscription-based or SaaS companies.
By tracking MRR over time, businesses can assess their growth trajectory, identify trends, and gauge the effectiveness of their sales and marketing efforts. This allows for timely adjustments to strategies and ensures alignment with revenue targets.
Investor confidence and valuation
For startups and growing businesses seeking investment or potential acquisition, MRR is a critical metric that investors often consider. A healthy and growing MRR indicates to investors that the business has a reliable revenue stream and a strong customer base.
This can instill confidence in the company’s potential for future success and positively impact its valuation, facilitating fundraising or acquisition negotiations.
What Are the Best Strategies to Increase MRR?
If your business is expanding but your monthly recurring revenue is lagging behind, in most cases, some changes should be made. Here are some actionable tips on how to increase your monthly recurring revenue.
1. Raise your prices
Companies often underestimate how much their prices could be brought up before they start losing loyal customers. Nevertheless, if you are planning on increasing your pricing plan, it is always wise to introduce some improvements to your product or service.
2. Improve customer retention
Implementing customer retention strategies ensures that your customer base keeps growing. This means that your monthly recurring revenue will keep increasing too, as long as you are using the right growth strategies for your business!
3. Create upsell opportunities
When specific features of your product or service are not enough for the average customer, it may be a good idea to create a premium plan for those who wish to opt for it. More expensive plans will not be your main source of revenue, but they may very well boost your average MRR.
4. Expand product offerings
Diversifying your product or service offerings can open up opportunities to upsell and cross-sell to existing customers. By introducing new features, add-ons, or complementary products, you can encourage customers to upgrade to higher-tier subscription plans or make additional purchases.
This expansion not only increases your average MRR but also enhances the overall value proposition for your customers.
5. Implement tiered pricing
Introducing tiered pricing structures allows you to offer multiple subscription options with varying levels of features and benefits. By catering to different customer needs and budget preferences, you can capture a wider range of customers and increase MRR.
Additionally, tiered pricing encourages customers to self-select into the plan that best fits their needs, reducing churn and improving customer satisfaction.
Additional Tips & Tricks
- A monthly subscription is a recurring revenue model that can lessen the dependence of a business on new customers. A customer, or subscriber, will continue to contribute to the company’s MRR even after the initial purchase;
- A subscription business should focus not only on new MRR and expansion MRR from new customers but also on the existing customer experience to preserve cash flow;
- Analyzing the average revenue gained on a month-to-month basis helps in the creation of marketing plans and other methods of acquiring new customers.
The Bottom Line
Monthly recurring revenue, or MRR for short, is the predictable total revenue that a business earns on a month-to-month basis from all channels. Analyzing net new MRR, along with other types of MRR, helps to gain valuable data on profitability and potential for future growth.
You’ve learned what monthly recurring revenue is, why it is important, and strategies to increase your MRR results. With all this knowledge and information, you can determine if monthly recurring revenue is the business model you need to develop for your company or organization.
Monthly recurring revenue FAQs
A subscription is a contract that allows for the recurrent sale of goods, services, or shares as opposed to a one-time sale. Although newspapers and magazines were the first to embrace the subscription business model, it is now widespread across numerous industries and marketplaces.
Increasing subscription revenue is not as simple as raising the subscription price. Ideally, you would like to add additional value to the products or services that are provided through your subscription business model, to justify a higher monthly subscription cost.
Your business’s monthly growth will be affected by a wide range of factors. Still, an average growth rate of around 10-20% is considered to be excellent. Arbitrary growth goals are not the most useful without knowing the ins and outs of a business, a good growth rate for your subscription business may differ from this.
Although they may seem to be the same thing at first glance, MRR is not the same concept as revenue. Your revenue on a month-to-month basis will change depending on growth, time of year, and many other aspects. On the other hand, MRR is a consistent predictable revenue that is used to track performance and make plans for the future.
