How to Calculate Monthly Recurring Revenue (MRR)
Consumers love their subscriptions, but the subscription billing model is also advantageous for companies because they get predictable monthly revenue. Knowing how much money is coming in every month makes it easier to hire more staff, invest in new product development, or sign a lease for a bigger office space, to name a few examples.
Subscription services revenue is commonly recorded as MRR.
Below, you’ll learn:
What MRR is
The types of MRR
How to calculate MRR
Let’s start by looking at the MRR meaning.
What is MRR?
MRR, an acronym for monthly recurring revenue, refers to all of your recurring revenue normalized into a monthly amount. Your company likely has a number of plans and billing periods, so the purpose of MRR is to average those out to one number that can be tracked over time. Your MRR is one of the many subscription model metrics that can be used to make informed decisions to drive company-wide growth.
How to calculate MRR
To calculate your MRR, take your total number of paid subscribers and multiply it by the average revenue per user (ARPU) that month.
For example, you have 200 subscribers paying an average of $35 a month. Your MRR would be 200*35 = $7,000.
To get your annual recurring revenue (ARR), you multiple your MRR by 12. So, in this example, 7000*12 = $84,000.
It seems simple and straightforward to calculate your MRR, right? In reality, there are a few factors that sometimes make it time-consuming to calculate your MRR.
What factors impact MRR?
Your accounting and finance teams would have a much easier time if all of your customers picked one subscription plan and stayed with your company for many years, but alas, that isn’t the case.
Here are three factors that complicate the MRR calculation:
New MRR
Your New MRR is the amount of money that new customers contributed to the top line. Let’s say your company acquired 65 customers this month, with 15 of them signing up for a $50 a month plan and 50 choosing a $30 a month plan. Your New MRR would be (15*50) + (50*30) = $2,250.
Expansion MRR
Your Expansion MRR is the additional MRR that results from cross-sells or upsells to your existing customers. If you had seven customers upgrade their subscription from the $30 tier to the $50 tier this month, your Expansion MRR would be (50-30) * 7 = $140.
Churn MRR
Your company is going to have subscriber churn, regardless of how well you service your existing customers. The impact of your cancellations and downgrades equals your Churn MRR. For example, four of your customers downgrade from the $50 plan to the $30 plan and five cancel their $30 plan. Your Churn MRR would be ((30-50)*4) + (-30*5) = minus $230.
Your Net New MRR is the amount of MRR that your company is gaining or losing.It is calculated by taking the sum of New MRR, Expansion MRR, and Churn MRR.
So, Net New MRR would be $2,250 (New MRR) + $140 (Expansion MRR) - $230 (Churn MRR) = $2,160.
Common scenarios that impact MRR calculation
Your New MRR, Expansion MRR, and Churn MRR are neat buckets to capture changes in your monthly recurring revenue, but your company is going to face scenarios that aren’t as clear-cut. Here are two examples of common scenarios that impact MRR calculation.
Example #1
You have a customer who wants to cancel their subscription, but you make an appeal to keep them on board. As part of the agreement, you give them three free months and then charge them $50 a month, paid upfront for one year. Your monthly recurring revenue would not be $50 a month and instead would be $40 a month, calculated as follows: ($50 x 12 months) / (12 months + 3 months).
Note that the one-time $600 payment would be averaged over the 15 months—you wouldn’t record all $600 as MRR in the month that the payment is made by the customer. The purpose of MRR is to measure growth and momentum, not cash flow.
Example #2
Here’s another possibility: a long-time subscriber makes a one-time purchase—should you add it to your MRR? You should not include the purchase because it is not recurring. If you were to include the amount, you would defeat the purpose of the MRR calculation (getting a baseline of how much revenue you can expect for future months).
Subscription management software can remove the burden of MRR calculation
Having visions of your accounting and finance teams being overwhelmed by MRR calculations? Buried in spreadsheets and trying to sort out all of the scenarios that impact MRR?
A top-notch subscription management software, such as Recurly, can prevent this nightmare outcome.
Recurly’s Monthly Recurring Revenue (MRR) Report measures the MRR of your company. The billing software supports over 140 currencies and converts the currencies into an MRR in your primary currency, a game-changer if you do business across the globe.
