Monthly Recurring Revenue” (MRR) is a key metric used in subscription-based business models, especially in the software-as-a-service (SaaS) industry. It represents the predictable and recurring revenue generated by a company from its subscription-based products or services on a monthly basis.

To calculate Monthly Recurring Revenue, sum up the revenue generated from all active subscriptions during a specific month. This metric is essential for businesses with subscription models as it provides a stable and predictable measure of their revenue stream, helping in financial planning, assessing the health of the business, and making informed decisions about growth and resource allocation.

Why Monthly Recurring Revenue is important

Monthly Recurring Revenue (MRR) is crucial for several reasons in businesses, especially those with subscription-based models such as software-as-a-service (SaaS). Here are some key reasons why MRR is important:

• Predictable Revenue Stream: CMRR ensures a stable income source from monthly subscriptions, aiding businesses in reliable cash flow forecasting and operational planning.
• Financial Planning: MRR is essential for effective financial planning, enabling accurate revenue projections and informed decision-making, particularly beneficial for startups.
• Business Health Assessment: MRR is a key indicator of a subscription business’s health. Consistent or increasing MRR signals success in customer acquisition and retention, while declining MRR may indicate issues like churn or pricing strategies.
• Investor Confidence: Investors scrutinize MRR for funding decisions. A robust MRR showcases potential for a steady return on investment, enhancing the business’s appeal.
• Subscription Model Optimization: Analyzing MRR provides insights into subscription plan performance, optimizing models for effective customer acquisition and retention.
• Resource Allocation: MRR guides resource allocation decisions by revealing revenue per customer and subscription, informing strategic planning for marketing, sales, and customer support.
• Growth Measurement: Tracking MRR offers a clear view of a company’s growth trajectory, allowing businesses to set targets, measure progress, and adjust strategies for effective financial and business objectives.

Monthly Recurring Revenue (MRR) is a vital metric for subscription businesses, providing key insights into financial stability, customer satisfaction, and overall performance. Its significance lies in guiding strategic decisions, aiding financial planning, and serving as a reliable measure of ongoing success.

Types of MRR

Monthly Recurring Revenue (MRR) encompasses various types, shedding light on different facets of a subscription-based business’s revenue stream. Common categories include:

• New MRR (NMRR): Revenue from newly acquired customers or subscriptions, emphasizing recent sign-ups.
• Expansion MRR (EMRR): Increased revenue from existing customers through upsells, cross-sells, or upgrades.
• Contraction MRR (CMRR): Represents lost revenue from downgrades or cancellations, crucial for understanding churn impact.
• Churned MRR (Churn MRR): Focuses on revenue lost from canceled subscriptions, quantifying the negative impact of churn.
• Net New MRR: Net result considering both positive (new, expansion) and negative (contraction, churn) impacts.
• Reactivation MRR: Revenue regained from previously churned customers who have reactivated their subscriptions.
• Partner MRR: Accounts for revenue generated through partnerships or reseller agreements.
• Non-Recurring Revenue (NRR): Includes one-time payments like setup fees, providing additional context beyond regular subscriptions.

These MRR types offer nuanced insights, enabling businesses to identify strengths, address weaknesses, refine pricing, and make informed decisions for sustainable growth.

What to include in MRR calculation

When calculating Monthly Recurring Revenue (MRR), you need to consider the various components that contribute to the recurring income generated by your subscription-based business. Here’s what to include in the MRR calculation

• New MRR (NMRR): Revenue from new customers or subscriptions, emphasizing recent sign-ups.
• Expansion MRR (EMRR): Increased revenue from existing customers through upsells, cross-sells, or upgrades.
• Contraction MRR (CMRR): Represents lost revenue from downgrades or cancellations, crucial for understanding churn impact.
• Churned MRR (Churn MRR): Focuses on revenue lost from canceled subscriptions, quantifying the negative impact of churn.
• Net New MRR: Net result considering both positive (new, expansion) and negative (contraction, churn) impacts.
• Reactivation MRR: Revenue regained from previously churned customers who have reactivated their subscriptions.
• Partner MRR: Accounts for revenue generated through partnerships or reseller agreements.
• Non-Recurring Revenue (NRR): Includes one-time payments like setup fees, providing additional context beyond regular subscriptions.

Exclusions for MRR Calculation

When calculating Monthly Recurring Revenue (MRR), certain elements should be excluded to maintain accuracy and focus on the recurring income generated by subscription-based models. Here’s what to exclude from the MRR calculation.

• Non-Recurring Revenue: Exclude any one-time payments, such as setup fees, implementation charges, or other non-recurring sources of income that do not contribute to the regular monthly subscription fees.
• One-Time Product Sales: If your business also sells products on a one-time basis that is not part of the subscription model, exclude the revenue generated from these sales.
• Professional Service Fees: If your business charges fees for professional services that are not part of the regular subscription, exclude these fees from the MRR calculation.
• Refunds: Deduct any refunds issued during the calculation period. Refunded amounts should not be included in the MRR to provide an accurate representation of ongoing subscription revenue.
• Taxes: Exclude any taxes or fees that are not directly related to the subscription fees. Focus on the net subscription revenue when calculating MRR.
• Discounts: If you offer discounts or promotional pricing that is not a part of the regular subscription fees, exclude the discounted portion from the MRR calculation.

By excluding these elements, the MRR calculation remains focused on the recurring and predictable revenue generated by the subscription-based business model. This allows for a more accurate representation of the business’s ongoing financial health and growth.

How Monthly Recurring Revenue Works?

Monthly Recurring Revenue (MRR) involves summing up the revenue generated from all active subscriptions during a specific month. Here’s a step-by-step guide on how to calculate MRR:

• Identify Subscription Plans: Know the different subscription plans or pricing tiers your business offers. Each plan may have a different monthly or recurring fee.
• Count Active Subscriptions: Determine the number of active subscriptions for each plan during the specific month you are calculating. Active subscriptions are those that customers are currently paying for.
• Calculate Revenue per Plan: For each subscription plan, multiply the number of active subscriptions by the monthly or recurring fee associated with that plan. This gives you the revenue generated from each plan.

• Sum Up Revenue: Sum up the revenue generated from all subscription plans. This total represents your Monthly Recurring Revenue (MRR).

Here’s a simplified example:

• Plan A: ₹520/month, 100 active subscriptions
• Plan B: ₹320/month, 50 active subscriptions
• Plan C: ₹360/month, 75 active subscriptions

It’s important to note that MRR is a dynamic metric that can change each month based on new subscriptions, cancellations, upgrades, and downgrades. Regularly tracking MRR provides valuable insights into the financial health and growth trajectory of a subscription-based business.