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Monthly recurring revenue (MRR) is a crucial metric for eCommerce, software as a service (SaaS), and subscription-based businesses to measure success. But what exactly is it, and why is it important? This guide will explore both questions, explain the different types of MRR, and discuss why tracking MRR is essential.
Monthly recurring revenue is the income a business can expect to receive each month. It represents stable, regular, and predictable earnings. MRR averages your pricing plans and billing periods to provide a consistent number to track over time. Monitoring MRR helps identify trends and highlights areas where your business can improve financially.
A rise in MRR indicates growth in customers, subscription plan upgrades, or both. Conversely, a fall in MRR suggests subscription cancellations, downgrades, and churn.
MRR helps predict the total revenue generated from active subscriptions in one month. This includes active charges, discounts, recurring add-ons, and coupons but excludes one-time fees.
Knowing your MRR helps you to understand your business’s overall financial status and helps to predict future earnings
The formula to calculate MRR is straightforward:
New MRR
New MRR is revenue from new customers within a month. For instance, if you gain 7 new subscriptions at USD125 each, the new MRR is 7 \times USD125 = USD875.
Upgrade MRR
Upgrade MRR comes from existing customers upgrading to higher-cost plans. For example, if a customer upgrades from a USD35 plan to a USD90 plan, the upgrade MRR is USD90 - USD35 = USD55.
Downgrade MRR
Downgrade MRR is the revenue lost when customers move to lower-cost plans. If a customer downgrades from a USD150 plan to an USD80 plan, the downgrade MRR is USD150 - USD80 = USD70.
Expansion MRR
Expansion MRR is additional revenue from existing customers due to add-ons, cross-selling, or upselling. It compares the revenue of a specified month to the previous month, always resulting in a positive value.
Reactivation MRR
Reactivation MRR is revenue from previously lost customers who return . If 10 churned customers re-subscribe at USD35 each, the reactivation MRR is 10 \times USD35 = USD350.
Contraction MRR
Contraction MRR is revenue lost from downgrades, cancellations, discounts, or paused subscriptions. For example, offering a 50% discount on a USD80 plan to 20 customers results in contraction MRR of 0.5 \times USD80 \times 20 = USD800.
Churn MRR
Churn MRR is revenue lost from subscription cancellations. If 12 customers paying USD200 per month cancel, the churn MRR is 12 \times USD200 = USD2,400.
Net New MRR
Net new MRR is the net change in MRR within a month:
Net New MRR=New MRR+Expansion MRR−Churn MRR
For example, gaining 10 new customers at USD80 each, 12 upgrades adding USD70 each, and 6 cancellations at USD150 each results in net new MRR of: (10×𝑈𝑆𝐷80)+(12×𝑈𝑆𝐷70)−(6×𝑈𝑆𝐷150)=𝑈𝑆𝐷800+𝑈𝑆𝐷840−𝑈𝑆𝐷900=𝑈𝑆𝐷740(10×USD80)+(12×USD70)−(6×USD150)=USD800+USD840−USD900=USD740
Monitoring MRR helps you understand your business's financial health and predict future revenue. It highlights trends, allowing you to make informed decisions about investments, budgeting, and growth strategies. Analyzing MRR provides insights into revenue fluctuations due to customer behavior and helps identify areas for improvement.
Budgeting
MRR gives an accurate picture of monthly earnings, helping you allocate resources effectively and plan for future investments.
Tracking Performance
Monthly tracking helps monitor subscription growth, assess financial health, and set long-term goals.
Forecasting Revenue
MRR helps make accurate sales predictions and adjust strategies to improve future performance.
Increase Prices Raising prices can boost MRR, but ensure quality improvements to justify the increase and notify customers to avoid dissatisfaction.
Offer Different Plans
Providing various subscription plans caters to different customer needs, encouraging upgrades to higher-priced plans with more features.
Create Upsell Opportunities
Upselling exposes customers to better features or premium plans, increasing MRR by leveraging existing customer relationships.
Retain More Customers
Focus on retention strategies like loyalty programs, promotional deals, and excellent customer care to reduce churn and increase MRR.
Pay Attention to Customers
Implement feedback systems to understand customer needs and make relevant improvements to your services.
Pursue More Leads
Reevaluate your marketing strategy to attract and retain more leads, enhancing MRR by expanding your customer base.
By implementing these strategies, you can effectively calculate, analyze, and improve your monthly recurring revenue, driving growth and success for your business.
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