Monthly Recurring Revenue (MRR) for subscription businesses
Although key performance metrics such as your customer retention and subscriber growth rate are important, many would argue that nothing is as vital as Monthly Recurring Revenue–after all, it is what makes the subscription business model so appealing.
This one stat can offer you a vantage point for developing a compelling marketing strategy based on an offering that works, tracking how a new pricing strategy works over time, or discovering a yearly subscription offering that appeals more than a month-to-month plan to a customer base you’re attracting.
Let's dive deeper into this almighty metric so that you can make the most out of your business.
Why is MRR important for subscription businesses?
By analyzing key trends, you can make more informed decisions to support the growth of your bottom line. This metric allows you to gain insight into:
Business performance: If you want to see which sales reps are hitting their monthly quota and which aren't, MRR will reflect this. Who is consistently selling to high MRR customers and who isn't? Are there issues in the sales cycle? What do certain clients have in common who consistently contribute to a higher MRR? In this sense, MRR can show you how your team is performing, as well as your business.
Sales forecasts: MRR can help you see the big picture to make more accurate sales forecasts. This is imperative when creating or altering your sales plan for the upcoming months as well as tracking the trends over time. The whole idea here is to measure momentum—especially if you plan on seeking an investor.
Your budget: When you know the average of how much money comes in each month, you can budget accordingly. One-time payments get excluded from this calculation, meaning you can base decisions about product and service offerings on reliable, future revenue. For example, based on the numbers, will you be able to run that lead generation campaign you've been planning? Can you expand your sales team? What result is your next marketing campaign aiming for?
Compliance and accounting: Subscription companies experience unbilled or deferred revenue, and proper MRR calculations are key to following the ASC 606 standards. More on this below.
What is Monthly Recurring Revenue?
MRR stands for Monthly Recurring Revenue, which is all of your recurring revenue normalized into a monthly amount, allowing you to average your pricing plans and billing period into a single, consistent number that you track across time.
Here’s a quick video that explains the basics of MRR.
How do you calculate monthly recurring revenue?
To calculate MRR, simply multiply your average revenue per customer and then times that number by the number of customers you have over a given period of time, which is month, in this case. This is the most straightforward and quick approach.
MRR = Total # of customers x average billed amount
For example, if you have ten customers paying an average of $150 per month, your MRR would be $1500
10 customers x $150/month = $1500 MRR
If you multiply the MRR number by 12, it will give you your Annual Recurring Revenue (ARR).
By comparing the MRR this month to a previous month’s MRR, you have a start on analyzing which current subscription plans were most appealing to your customers, which subscription cancellations hurt less than others, and much more.
As you grow your active subscriptions, you'll want to track the factors that change your Monthly Recurring Revenue. This will help you better understand revenue growth so that you can focus on areas that need improvement or further optimization.
New MRR: This is the monthly revenue that is generated from new customers over the previous period. The same calculation applies. For example, if you acquired five new customers with a monthly subscription plan costing $100 and three customers paying $150 on a monthly plan, your new MRR would be $950.
(5 customers x $100) + (3 customers x $150) = $950
Expansion MRR: This is increased MRR from current subscription customers. This may result from a cross-sell or upsell. For example, if four customers upgrade their monthly subscriptions from $50 to $100, your expansion MRR would be $200.
Churn MRR: You will also experience cancelations and downgrades, which will give you your churn MRR, or revenue churn. If two customers paying $100 canceled in a month and three other customers downgrade from $100/month to a monthly plan costing just $50, your churn MRR would be $350. This means that you'll have $350 less in your recurring revenue for next month.
Net New MRR_ To calculate your growth, you'll need to consider all three of the MRR types above. This will help you determine how much MRR you are gaining or losing. As long as the sum of new MRR and expansion MRR is more than churn MRR, you've made money. Net New MRR = Net MRR + Expansion MRR - Churned MRR
Avoid these common mistakes when calculating MRR
In 2004, Netflix was sued by its shareholders for allegedly reporting inaccurate churn rates. Although this case was eventually thrown out in court, this is a perfect example of how detrimental calculation mistakes can be—whether or not they are intended.
Tracking your Monthly Recurring Revenue will only be effective and accurate if it's calculated correctly, so stay mindful of these common mistakes.
Mistake one: Including full-value contracts in a single month
If a subscriber pays for their full subscription upfront, you need to divide that value by the intended subscription length. MRR is NOT a measure of cash flow—it's a momentum and growth measurement. Yes, you’re tracking a steady income stream, but including a single payment for a yearly service, contract will only throw off the accounting and make that single time period look lucrative. Don't include the value of any quarterly, semi-annual, or annual contracts in a single month.
Check this out: Everything you need to know about ASC-606 for subscriptions
Mistake two: Including one-time payments
Again, plugging these one-off sales into your MRR calculation can give you misleading data. One-time payments are not recurring, so when included in your MRR calculations, your financial model will be inaccurate. Yes, your team needs to sell additional products, and the addition to your source of income is invaluable. However, MRR studies how profitable the ongoing relationship is, as measured in monthly payments. One-off payments are a sure way to muddy an accurate picture.
Mistake three: Not including discounts
Offering discounts can be a brilliant strategy for subscription-based companies. However, make sure they are represented accurately when calculating your MRR. If you give a subscriber a 50% discount on a $100/month plan for x-number of months, your MRR will not be $100/month as long as that promotion is active. It’s $50/month. Once this promotion is over, you can adjust your MRR accordingly.
Mistake four: Adding trial customers
Adding trial customers to your MRR calculations will skew your figures because these customers are not yet full subscribers. Since these "customers" do not yet pay a monthly recurring fee, they do not yet contribute to your Monthly Recurring Revenue.
Take these steps to grow MRR
Step one: Don't underprice your product or service
If you are solving a real, tangible problem for your customers, know your worth. If you have already launched and now feel as though you're not charging enough, increase your price slightly and see how it affects your growth rates. Once these increases no longer have a positive effect on revenue growth, leave your price as is and test again at a future time.
Step two: Upsell
When you run a subscription model business, you have an existing customer base that already trusts your business. Build up that revenue per user. If you find subscribers are getting value out of your product or service, offer them more benefits. For example, a per-user or feature upgrade.
Step three: Ditch long free trials
A free trial is a marketing tool that if not implemented correctly, can do more harm than good. Free trials can often give subscribers a limited view of what you offer. They then perceive your product or service as something that offers little value. The solution here? Offer a time-limited free plan that allows them to fully experience the benefits of your product or service.
Check this out: See how MarketMuse uses free trials to fuel subscriber growth
Grow faster, smarter, and stronger with Recurly
Subscriptions continue to see sustainable growth. According to a recent survey, nearly 70% of Americans have multiple subscriptions, with 28% having at least four—and they expect these numbers to rise.
This approach focuses on existing customers instead of acquiring new customers, which can cost five times more. The goal is to generate recurring revenue and strengthen consumer relationships.
Whether you’ve recently launched a subscription-based startup or expanding your business, keeping track of all subscription metrics is key to success.
Recurly is a subscription billing and management platform that will help you optimize your rapidly-growing subscription business. Ready to get started?