Nowadays, businesses heavily rely on their performance metrics to achieve their specific goals. And why not because this data analysis helps them form robust strategies so that they can scale up their business.
MRR is one of those key factors offering a comprehensive view of earnings within a month, allowing you to predict revenue streams from subscription-based services. Such analysis can turn the tables for you as it guides you on when to make necessary changes in pricing plans.
To date, there is no subscription-based business that hasn’t seen customers churning out or the rise of new ones. Regular analysis, typically on a monthly basis, is essential to navigate these fluctuations. If you’re unsure where to start, we will help you understand what is MRR in business and how to calculate MRR. So, let’s straightaway find out.
What is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue (MRR) is the process of measuring revenue collected from customers who have an active subscription plan. Anything such as coupons, addons, or service fees you charge from customers monthly falls under MRR.
“What is MRR” in business means a crucial metric for growth-focused companies to forecast future revenue, make informed decisions, and achieve their business goals. An increased MRR indicates an increase in customer acquisition, plan upgrades, or both. A decreased MRR means there are increased downgrades, cancellations, and churn.
The perfect example of MRR is a subscription-based company. You have 7 customers with an active subscription plan, paying you $40 individually every month. Then, the result of multiplying 7 by $40 is your monthly recurring revenue. So, $280 is your MRR.
Types of MRR
Monthly Recurring Revenue is classified into 6 types to identify different factors impacting this metric. Each MRR type provides in-depth insights into a business’s financial health and customers’ demands. Here are different types of MRR.
1. New MRR
New customers who recently purchased a subscription plan fall under the new MRR type. Basically, the new MRR is an increase in your customer base because of new buyers in a particular month. Suppose you have 5 new customers paying $100 individually in a month. The new MRR will be $500.
2. Expansion MRR
Expansion MRR or upgrade MRR refers to the already subscribed users who decided to upgrade to higher plans or availing extra services. So, expansion Monthly Recurring Revenue is a monthly revenue generated by your existing customers. For example, if three existing customers paying $70, choose a $100 plan, then $90 would be an MRR expansion.
3. Churn MRR
The revenue loss suffered due to some customers canceling their subscription plans in a single month is known as churn MRR. Also, if any of them downgrade their plan, lowering your monthly revenue it comes under churn Monthly Recurring Revenue. if one customer cancels a $100 plan and another one downgrades from a $100 to a $70 plan, then $130 would be MRR churn.
4. Contraction MRR
Contraction MRR is the result of customers pausing their services or removing add-on features from their current plan. Sometimes it can be due to subscribers opting for downgrading or removing their plans over a period of 30 days.
5. Reactivation MRR
If any of your old clients request for the reactivation of their already expired plan, then the revenue generated because of these previously churned clients is the reactivation MRR. It states that you brought back lost customers to increase your revenue on a monthly basis. Assuming 4 customers reactivating a $70 plan in the same month, your reactivation MRR is $280.
6. Net New MRR
The total sum of new and expansion MRR along with the removal of churn MRR is known as net new MRR. This Monthly Recurring Revenue presents actual revenue growth generated in the particular month. Going with the same data as above, the new MRR is $500, the expansion MRR is $90, and the churn MRR is $130, the net new MRR would be $460 ($500+$90 -$130).
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How to Calculate MRR
Alright, you know MRR meaning in business terms but don’t know how to calculate it. The MRR calculation can be done in two ways. The first is to figure out how many new buyers availed of your service last month and the average revenue per user (ARPU). Once you have two numbers, put them in the below given MRR formula.
Monthly Recurring Revenue (MRR) = [Number of New Buyers] * [Average Revenue Per Customer]
For instance, your company won 15 new paid customers. You collect $100 from each of the 15 new members every month. Then, simply put those numbers in the above formula.
MRR = [$15 x $100] = $1,500
So, the resulting amount from the above calculation is your MRR i.e. $1,500.
Secondly, you can identify MRR by calculating the sum of the cost of each subscription plan you sold over a month. Suppose your company offers two subscription plans – A basic plan of $70 and a premium plan of $100.
In the last month, you have 35 subscribers, of which 10 customers subscribed to the premium plan, while the other 25 customers opted for a basic plan. So, the MRR would be $2750 for the previous month.
[$10 x $100] + [$25 x $70] = $2,750 MRR
In most cases, the resulting MRR may vary according to the method used for its calculations.
How to Increase MRR
If you’re facing a constant decline in Monthly Recurring Revenue, then here are some excellent ways to boost your Monthly Recurring Revenue (MRR) and achieve financial goals. Let us explore them.
1. Work on Pricing Strategy
Optimizing pricing plans consistently can maintain the cash flow through economic ups and downs. You can analyze current market trends, observe competitors, and consider customers’ demands while adjusting your pricing plan.
If your current plans only help you get fewer customers or those are likely to churn out in the near future, you must introduce other plans. So, based on your target audience and ongoing trends, you need to establish a robust pricing strategy.
2. Increase Customer Retention
Customers are the reason for your continuous incoming cash flows. So, you can not just let them walk off as it will significantly impact your monthly revenue. Therefore, you can roll out customer loyalty programs to reduce customer churn and increase your customer retention.
Or else, find what actually does not work for them to continue with your service. Fixing such issues can aid you in delivering great customer satisfaction.
3. Get Additional Revenue Streams
Businesses struggling to generate sustainable revenue should consider adding more revenue streams to improve MRR. In case your only source of income is from one main product, then you should expand your offerings, which means to include more products or add-ons.
Also, you can collaborate with other industries or brands to sell products on your behalf and generate extra revenue.
4. Apply Upselling Tactics
Increase MRR by selling costly premium plans to your buyers, which is known as upselling. The upselling technique is all about persuading customers to opt for higher-priced products instead of basic products or plans.
For example, if you are running a subscription-based company, then upsell customers to higher plans instead of settling with starting plans that usually have fewer features.
Conclusion
MRR is the key metric that unfolds your overall performance of the month. It can be used to get insights into customer behavior and form robust strategies. Of course, it will present the financial health of your business so that you can make the necessary changes in the pricing plans.
However, you need to be sure of doing the right calculations with necessary data such as the number of paid users and average revenue(ARPU). If gathering this data from paper documents is time-consuming, we recommend using Moon Invoice to manage your financial documents on a cloud platform. That way, it would be easier to calculate monthly recurring revenue or annual recurring revenue (ARR). Try using it for free.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
