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Measuring Monthly Recurring Revenue For SaaS Business
SaaS companies rely heavily on predictable revenue streams like monthly recurring revenue (MRR) to measure growth and sustainability.
- MRR tracks expected recurring revenue from customer subscriptions each month, excluding one-time charges.
- It differs from annual recurring revenue (ARR), which looks at longer-term subscription commitments.
- Understanding different MRR types—new, expansion, churn, reactivation, and net—helps monitor business health.
- Calculating MRR can be done through customer counts and average revenue per user for simplicity and accuracy.
- Increasing MRR involves strategic pricing, feature upgrades, reliable lead generation, strong customer support, and avoiding unproductive free plans.
This article provides practical insights to better interpret and boost your SaaS company’s recurring revenue.
Ways SaaS Business Models Earn Money
SaaS businesses have numerous revenue streams, they can generate profits from a combination of either of the following:
- Subscription revenue
- Upsells
- Training Fees
- Set up Fees
- Advertising
- Setup Fees
- Charge customer for more Storage, Speed, or Data
- Charge for new or updated versions
- Affiliate Sales
- API or application program interface
But the bread and butter of SaaS companies lie in subscription revenue. Annual and monthly subscription plans are quite common in SaaS businesses. Annual subscription plans work better for users who are certain to use the service for at least a year or longer. SaaS businesses offering Annual subscription plans generate an Annual recurring revenue.
While Monthly subscription plans work best for short-term users, annual plans normally come with a cheaper implied monthly rate as incentives are provided to enter into a longer-term commitment. This also reduces friction with potential customers. SaaS businesses offering Monthly subscription plans generate Monthly recurring revenue.
What Is Monthly Recurring Revenue
The Monthly Recurring Revenue (MRR) is the SaaS business’s total expected and recurring revenue from customer subscriptions at the end of each month. It is one of the key metrics SaaS business owners and investors track despite not being a GAAP (Generally Accepted Accounting Principle) measurement.
Key facts about Monthly Recurring Revenue:
- Key metric specific to the SaaS business and subscription industry
- Must be recurring and excludes one-time charges such as onboarding charges, set-up fees, training fees, etc.
- Generally expressed as a $ amount (or your local currency) and depending on the type can be expressed as a rate.
- Subscription plans must be billed monthly
- Subscription term agreements are less than a year
- A business insights figure and not an accounting or tax figure
Monthly Recurring Revenue (MRR) VS Annual Recurring Revenue (ARR)
Both metrics are used by SaaS and subscription businesses, the key difference is the time period. When a SaaS business offers annual or multi-year subscription terms, the annual recurring revenue (ARR) is an appropriate metric. On the other hand, the monthly recurring revenue (MRR) is appropriate for SaaS companies that also offer monthly plans. In this case, the annual subscriptions are converted to their implied monthly subscriptions and added to the monthly plans.
Also, due to its long time period, the ARR gives SaaS business owners and investors an overall or macro-scale point of view. Despite having a shorter time period, MRR offers a detailed and closer (micro-scale) point of view. This offers a more current or up-to-date comparison of the SaaS business’ revenue.
Types of Monthly Recurring Revenue
- New MRR. Monthly Recurring Revenue from new customers.
- Expansionary MRR. Additional (such as upsells and upgrades) monthly recurring revenue from existing customers.
- Churn MRR. Monthly Recurring Revenue lost from monthly paying customers canceling or downgrading monthly subscriptions. Also called the Contraction MRR.
- Reactivation MRR. Monthly Recurring Revenue from the reactivated subscription of previous customers
- Net New Monthly Recurring Revenue. The Monthly Recurring Revenue from new subscriptions and upsells/upgrades minus the revenue lost from downgrades and cancellations.
Why Calculate Monthly Recurring Revenue
One of the important ways for SaaS companies to succeed is for business owners and managers to have a clear picture of what is creating growth and contraction to make strategic decisions that will help them scale. Using the Monthly Recurring Revenue is important because:
- Tracks performance. MRR shows SaaS businesses’ revenue momentum whether it is increasing or slowing down month-to-month as well as identifies any opportunities, strengths, and weaknesses.
- Helps in forecasting and budgeting. Due to its recurring nature, the MRR is used to forecast future sales month by month. When monthly recurring revenue exists, so do monthly recurring expenses and costs. Using the MRR, SaaS business owners can also plan a budget for the upcoming months.
- Guides sales and marketing team. The MRR can assist the sales and marketing team in determining if action plans were effective in gaining more customers as well as keeping current ones. The MRR can also serve as a starting point to design strategies for future growth.
- Increases potential to build customer relationships. SaaS businesses with monthly recurring revenue have greater interaction with customers as they deliver value on a monthly basis.
- Supports decision-making. With an understanding of how MRR works and what drives it, business owners can make sound business decisions that will greatly affect profits.
How To Calculate Monthly Recurring Revenue
2 Types Of Monthly Recurring Revenue Formulas
Assume you run a SaaS business with 1,000 paying monthly customers. 400 of the customers subscribe to the Starter plan which costs $29/month, 300 subscribe to the Lite plan costing $49/month and another 300 are subscribed to the Standard $99/month plan. The average revenue per user is $15.
There are two formulas to use for calculating your MRR:
Customer by Customer method. The Monthly Recurring Revenue is the sum of the monthly fee paid by every single paying customer. The drawback to this method is as most customers will subscribe to different plans and pay varying amounts, the calculation may become complex over time and requires a consistent and up-to-date customer record.
Example MRR Calculation using Customer by the Customer method
Average Revenue Per User (ARPU). The Monthly Recurring Revenue is the result of multiplying the total number of paying customers by the average amount users pay (SaaS business revenue) each month. This method is usually a preferable alternative to using the customer by customer as it’s more simple and more straightforward. Also called Average Revenue Per Account (ARPA).
Example MRR Calculation Using Average Revenue Per User (ARPU)
Ways To Effectively Increase Monthly Recurring Revenue
For SaaS business owners, the Monthly Recurring Revenue is a direct reflection of how the SaaS business model generates profits. So, increasing Monthly Recurring Revenue translates to increasing the business’ bottom line. Here are sure 5 ways to increase your SaaS business’ Monthly recurring revenue.
- Increase plan pricing. Most business owners may view this as counterproductive, especially for SaaS business models that are conscious about pricing for fear of a negative customer perception or outright rejection of the product or service. Try a 10% or 20% price increase and find the sweet spot for your pricing strategy, underpricing a SaaS product or service that solves customer problems and needs can hinder its perceived value.
- Unbundle features and instead offer Upgrades. On average, customers do not use all the features and functionality available as long as the core or main value offered by the SaaS business model remains unchanged. Business owners can justify unbundling such features and convert these to add-ons, upsells, or upgrades
- Get more reliable leads. Monthly Recurring Revenue came from paying customers and paying customers came from lead generation. More leads mean more revenue. Sales and marketing teams must carefully plan out strategies that follow this concept. At the same time, business owners must keep an eye on the relationship between every dollar spent on marketing to every recurring dollar revenue generated.
- Do keep reliable customer support. This one is pretty straightforward, keep your customers satisfied and your Monthly Recurring Revenue increases. Not only will they remain as paying customers but they will make strong advertisement mediums- ever heard of 5-star customer reviews?
- Avoid free plans and unlimited features. Free trials are a good way for customers to test the product or service without any commitment as well as spread awareness of it. However, it doesn’t directly translate to monthly recurring revenue. As much as possible SaaS business models must focus on providing solutions right away. The same goes for offering unlimited features, the price for the solution the SaaS product or service offers should increase together with the value it provides for the customer.
Monthly To Monthly Recurring Revenue
On the surface, Monthly recurring revenue is a straightforward metric but dig in deeper and it can give you a crucial picture of how the SaaS business model is performing; is it growing or not at all. Are there new customers? Are there customers canceling a subscription? Bear in mind that the monthly recurring revenue metric is in essence simply a number, a number on a given month holds little value. How the monthly recurring revenue changes over time holds real value and insights to a SaaS business.
We hope this article answered your questions and helped you understand more about Monthly Recurring Revenue for SaaS business. To give you an idea as a reference, please feel free to check out our selection of SaaS Business Financial Model Templates here:
