What is MRR and Why Should You Measure It?

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MRR is short for Monthly Recurring Revenue, and it’s the effective monthly revenue from all active recurring subscriptions under an account.

For example, a $10/monthly plan = $10 MRR and a $120/annual plan = $10 MRR.

MRR is also one of the most important SaaS metrics and KPIs. It’s used to measure the total predictable revenue generated by a customer base.

If you’re running a subscription based business, it’s arguably the most important metric to monitor because it gives you a baseline—this month’s recurring revenue should indicate next month’s recurring revenue, unless you add a customer or lose a customer.

MRR also helps you to normalize annual charges, providing a better picture of the business’s true financial health and performance.

Four types of MRR

There are four types of MRR that your subscription business should be tracking regularly, including:

  • new business MRR - also referred to as the 'Hunting' MRR
  • expansion MRR - or the 'Farming' MRR
  • contraction MRR, and
  • churned MRR.

New business MRR includes revenue earned from new customers. This type of MRR is a good indication of the success of your marketing and sales teams, as well as the ongoing growth of your business. It shows your subscription business is bringing in qualified leads and successfully converting those leads to customers.

Expansion MRR is adding recurring revenue from your existing customers. This could be from upgrading a plan, adding additional recurring features, and increasing the number of subscriptions on an account. Check out this article for tips on how to expand your MRR.

Contraction MRR is the opposite—it’s losing MRR from your existing customers when they downgrade their plan, unsubscribe from additional recurring features, or reduce their number of subscriptions.

Finally, churned MRR is the revenue you lose when customers discontinue their subscription with your business.

Find more details and insight into these four types of MRR here, including how they can help you make more strategic decisions for your subscription business.

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MRR changes are an indicator of the health of your subscription business

Charting MRR helps your business:

  • see right away if this month was better than last month
  • recognize month-over-month trends to compare customer satisfaction, and
  • once your baseline is established, help you answer forecasting questions like, how much new business do you need to bring in to meet projections or your sales quota?

MRR is one of four reporting pillars that are key to SaaS, along with Sales, Cash, and Revenue. When measuring and reporting on MRR, focus on customers that are moving forward with you, rather than the ones that aren’t paying, as well as what’s going to be coming in month after month.

This means excluding canceled and non-paying customers that have aging accounts receivables, and one-time charges like setup fees, support, and professional service charges, etc. If your subscription service includes usage charges, only include those that are repeatable, such as user licenses.

Segment MRR for cohort analysis

We encourage you to segment your subscription business’s customer base and look at your MRR by the different segments. This can help you to identify customer characteristics that are correlated with strong revenue and lower cost of support and service, respectively.

For example, look at customers that are actively using the service vs. those that might just be paying for it and not using it. Your passive—or less engaged—customers are higher risk because they're more likely to churn and drop away.

Company size, sector, customer type (B2B, B2C, B2B2C), and use-case are other common ways to segment your customer base by cohort.

MRR vs ARR

Finally, while MRR is a great way to track the health of your business on a consistent basis, you may also choose to track Annual Recurring Revenue, or ARR.

ARR is an especially useful metric when your business offers multi-year agreements with its customer. It enables you to see a broader picture of your business's health and trajectory.

Tags: SaaS Subscription Billing Recurring Billing

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