MRR is short for Monthly Recurring Revenue and is the effective monthly revenue from all active recurring subscriptions under the account. MRR is also one of the most important SaaS metrics and KPIs.
- Example: A $10/monthly plan = $10MRR and a $120/year plan = $10MRR
If you’re running a subscription based business, it is arguably the most important metric to monitor because not only does it give you a baseline—this month’s recurring revenue should indicate next month’s recurring revenue, unless you add a customer or lose a customer—but it also helps you to normalize annual charges.
Four types of MRR
There are four types of MRR that your 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 is one good indication of the success of your marketing and sales team, as well as the ongoing growth of your business.
Expansion MRR is adding recurring revenue from your existing customers. This could be from upgrading a plan or adding additional recurring features.
Contraction MRR is the opposite—it is losing MRR from your existing customers when they downgrade their plan.
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 business.
MRR changes are an indicator of the health of your business
Charting the MRR helps you to see right away if this month was better than last month, recognize month-over-month trends in order to compare customer satisfaction, and once your baseline is established, help you answer forecasting questions like how much new business 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, and one-time charges like setup fees, support and professional service charges, etc. If your 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 customer base and look at the 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.
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. This 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.