Monthly recurring revenue (MRR) is a critical growth and financial health metric for many SaaS businesses, particularly those that rely on monthly subscription models. Understanding how much revenue is coming in consistently each month and how MRR is changing over time are crucial parts of managing a SaaS business and an area that executive teams, board members, and investors keep a close eye on.
In this article, we cover the details of MRR, how it’s calculated in SaaS companies, and why it matters so much.
What is Monthly Recurring Revenue (MRR)?
Monthly recurring revenue, also known as MRR, is a metric that shows the amount of revenue that a business expects to generate on a monthly, repeating basis. For many SaaS businesses, MRR is a critical metric to measure and keep track of, as the core revenue of the business will primarily come from monthly subscription revenues.
Keep in mind that MRR does not include all revenue earned and focuses only on recurring revenue, which excludes revenue earned from one-time charges. With SaaS subscriptions, customers can often churn out at any time, move to a different pricing tier, or add on services, causing fluctuations in overall revenue earned. With MRR, revenue is distilled down to only the revenue that predictably comes in each month, helping to provide a more stable metric of financial health.
Why is Monthly Recurring Revenue (MRR) important?
MRR is an important SaaS metric for two main reasons:
Serving as an indicator of financial performance and growth
For SaaS companies, recurring revenue is the lifeblood of the business. The beauty of subscription models is that revenue can compound over time, and while the upfront cost of acquiring a customer may be high, the business can see significant ROI over the lifetime of a customer. As the business grows and adds on more and more customers, recurring revenues can increase exponentially. MRR is a critical tool in understanding how well your SaaS business is performing from month to month.
Measuring MRR over time is also a key signal of growth for a SaaS business. If MRR is increasing each month, then it’s a positive sign that the business is headed in the right direction. Month-over-month increases in MRR can mean that you’re adding on new customers, renewing and upselling existing customers, all the while reducing churn. If MRR growth starts to flatten out or, worse yet, decline, then you know something must be changed, and fast. In either case, MRR serves as an important leading indicator of the health and viability of a SaaS business.
Simplifying revenue into a repeatable, predictable metric
SaaS revenue comes from many sources, from implementation and setup fees to service charges to one-time purchases. Moreover, customers can potentially pay up front or on an annual, quarterly, or monthly cadence. Because of the choppy nature of how revenue flows into a SaaS business, it may be difficult to understand how the business is doing by simply looking at total revenue. With recurring revenue metrics like MRR, you’re able to distill revenue down to the core of what’s driving the business — repeat revenue that excludes one-time charges.
For example, let’s say you have two customers. One customer pays monthly for your services at $1,000 a month, plus a one-time setup fee of $500 at the start of the year. The other customer paid for a whole year in advance, allowing him to get a 15% discount. He pays $10,200 in January for the full year ($1,000 x 12 months - 15% discount).
In January, your MRR would be $1,850 ($1,000 + $10,200 / 12), even though your business actually received $11,700 ($1,000 + $500 + $10,200) that month.
With MRR, revenue is normalized into only revenue that is recurring and amortizes monthly any revenue that is paid up front. If that doesn’t make total sense to you, don’t worry. We’ll dive into calculating MRR in the next section.
How is Monthly Recurring Revenue (MRR) calculated?
MRR is the sum of all of your subscription revenue for a given month, including recurring revenue from expansions (e.g., add-ons and upgrades) and excluding any one-time charges (e.g., implementation fees), and removing any recurring revenue lost from downgrades or churn.
Practically speaking, MRR is generally calculated in either of two ways – taking the average revenue per user (ARPU) and multiplying that by the number of active users:
Or taking the average revenue per account (ARPA) and multiplying that by the number of active accounts:
What is an example of Monthly Recurring Revenue (MRR)?
Let’s walk through a simple example. Say you have 100 active customer accounts. All of these customers are signed up for the $200 per month plan your company offers. Because everyone is on the same plan, the ARPA per month is just $200.
Using the formula:
Let’s say you have 80 accounts on the $200 per month plan and 20 accounts on the $300 per month plan. You'll need to recalculate ARPA because now your customers are on different plans.
What if all of your customers were on quarterly payment plans, so instead of paying you on a monthly basis, they paid at the start of every quarter? Would that change your MRR of $22,000?
No. Any upfront payments (whether quarterly, semi-annually, or annually) need to be amortized monthly, even if you get the cash all in one lump sum.
What is the difference between MRR and ARR?
Annual recurring revenue (ARR) and MRR are closely related, but differ by the time period in which recurring revenue is looked at. While MRR refers to the amount of revenue a business expects to generate on a monthly, repeating basis, ARR refers to the amount of recurring revenue expected on a yearly basis.
For companies that sell annual or multi-year subscriptions, ARR may be the more commonly used metric when evaluating financial performance and health. MRR can be good for any company to understand recurring revenue on a more granular level, but fluctuations month to month may not be as important for companies that primarily rely on annual contracts.
What is a good MRR growth rate?
A “good” MRR growth rate can depend on a number of factors, including industry, company stage, funding, state of the economy, and more. It’s not easy to pin down a specific growth rate that you should follow, but many SaaS industry veterans agree that if you can achieve a 10-20% MRR growth rate after hitting $1 million in ARR, this should put you in a strong position to raise funding and earn a desirable valuation.