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.
Research shows 27% of global consumers will increase the number of subscriptions they have, including 36% of U.S. consumers. This research shows businesses the value of subscription-based models, especially those in the service sector. The same applies when you have a solid product that makes consumers return month after month.
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 are planning a subscription-based startup or are currently expanding your subscription-based model, it's important to understand all critical metrics, including Monthly Recurring Revenue (MRR). After all, it is what makes the subscription business model so appealing. Let's dive deeper into this almighty metric so that you can make the most out of your subscription business.
MRR stands for Monthly Recurring Revenue, which is all of your recurring revenue normalized into a monthly amount. This allows you to average your pricing plans and billing period into a single, consistent number that you track across time. By analyzing key trends, you can make more informed decisions to support the growth of your bottom line.
To calculate MRR, simply multiply your average revenue per account and then times that number by the number of customers you have that month. 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).
As you grow your subscription business, 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 Recurring Revenue that is generated from new customers. The same calculation applies. For example, if you acquired five new customers paying $100/month and three customers paying $150/month, your new MRR would be $950.
(5 customers x $100) + (3 customers x $150) = $950
Expansion MRR — This is the MRR that results from existing customers. This may result from a cross-sell or upsell. For example, if four customers upgrade their 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. If two customers paying $100 canceled in a month and three other customers downgrade from $100/month to $50/month, your churn MRR would be $350. This means that you'll have minus $350 on 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 are more than churn MRR, you've made money. Net New MRR = Net MRR + Expansion MRR - Churned MRR
Although key performance metrics such as your retention and growth rate are important, many would argue that nothing is as vital as Monthly Recurring Revenue.
This metric allows you to gain insight into:
Performance — If you want to see which sales reps are hitting their quota each month 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 so that you can make more accurate sales forecasts. This is imperative when creating or altering your sales plan. The whole idea here is to measure momentum — especially if you plan on seeking an investor.
Your budget — When you know an average of how much money comes in each month, you can budget accordingly. Based on your MRR, you can make decisions that support the growth of your business. 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?
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.
If a subscriber pays for their full subscription upfront, you need to divide that value by the intended subscription length. This is NOT a measure of cash flow — it's a momentum and growth measurement. Don't include the value of any quarterly, semi-annual, or annual contracts in a single month.
Again, plugging these values into your MRR calculation can give you misleading data. These payments are not recurring, so when included in your MRR calculations, your financial model will be inaccurate.
Offering discounts can be a brilliant strategy. 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 will be $50/month. Once this promotion is over, you can adjust your MRR accordingly.
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.
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. If you find subscribers are getting value out of your product or service, offer them an upgrade. For example, a per-user or feature upgrade.
Step three—ditch your free plan. 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 experience the benefits of your product or service more fully.
Recurly is a subscription billing and management platform that will help you optimize your rapidly-growing subscription business. Ready to get started? Request a demo today!