If you are a business owner, the MRR is something you can’t ignore. The most critical metric of any subscription-based company is the Monthly Recurring Revenue, which is almost always abbreviated as MRR. The MRR is part of what makes this kind of business model so effective. Indeed, since there is a possibility of getting a new regular revenue with each new customer, a subscription is quite advantageous over a one-time sale item. Therefore, let’s learn more about MRR and how to calculate it.
What is monthly recurring revenue (MRR)?
MRR is a measure of the predictable and recurring revenue components of your subscription business. It would usually exclude one-time and variable payments, but the latter may be required for month-to-month financial results.
How to calculate MRR?
The most efficient method is to simply add up the monthly fees charged by each and every paying customer in your installed base. For example:
- Customer A pays $300 per month
- Customer B pays $200 per month
- Customer C pays $100 per month
The MRR would be $600. Please remember that since you may have different offers or different plans, it is normal to have different price points.
What’s ARPA and how to use it to know your MRR?
Using the ARPA (Average Revenue per Account) is a simpler way to measure your MRR. All you need to do to know your ARPA is divide your MRR by the total number of accounts.
ARPA = MRR / Total # of Customers
20 paying customers pay an average of $100 a month, 20 x 100 your MRR is $2,000.
So the equation looks like this:
(Total Number of Customers) x ARPA = MRR
How to calculate MRR growth?
Although MRR is a simple metric, it is crucial to understand its meaning. That said, how do you increase your MRR so that your startup can grow? How to know if your MRR is good or bad, depending on the current financial situation of your business? To answer these questions, we should consider these different MRR categories:
- New MRR – MRR from new customers
New MRR simply refers to new revenue generated by newly acquired customers. For example, you got three new $200/month customers and one new $100/month customers in a given month. For that month, your new MRR will be $700.
- Expansion MRR- MRR from existing customers
Assume you have 3 customers who want to upgrade their plans from $200 to $300 a month. That means you’ve increased sales from currently subscribed customers, which we refer to as Expansion MRR. For that month, your Expansion MRR would be $300. Please note that upselling (customers upgrading their plans) and cross-selling can both contribute to Expansion MRR (customers buying additional products or services).
- Churned MRR – Lost MRR from canceled customers
You should also think about your cancellation, which is inevitable and also part of the game. The revenue lost as a result of customers canceling or downgrading their plans is known as MRR Churn. So, let’s suppose you had three $100/month contract cancellations in a given month, and 2 other customers downgraded their plans from $300/mo to $100/mo. Your MRR Churn would be (300 + 400) = $700. It basically means that your recurring sales will be $700 lower next month.
To calculate the MRR growth, you just need to put these 3 types of MRR into the following formula:
Net New MRR = New MRR + Expansion MRR – Churn MRR
How to grow your MRR?
Recurring revenue, as great as it sounds, can also be the most frustrating and costly part of your company. Don’t worry, we have some methods to help you grow your MRR.
Let’s take a look at three things you can do right now to start bringing in more money!
1. Increase the charge
This might sound strange but it is sometimes the best course of action. To minimize the chances of being rejected, most businesses charge very little. In reality, you shouldn’t charge too low if you’re solving some actual, concrete problems for your customers. Let’s say you are selling a subscription plan to a software, don’t forget that businesses are looking for a program for at least one of these three reasons: to save time, save money, and increase their earnings. All of this is summed up as “value”… and businesses are willing to pay for “value.”
It is much less expensive to increase sales from a current client than to attract new customers. It’s not that you don’t require both; it’s just that attracting new customers is often more costly. If the customers you serve are growing and gaining more value from your company over time, you should adjust your pricing accordingly. If your consumers are receiving more value, now is the ideal time to upsell the current offer on the table.
3. Stop offering a free plan
Almost every tech company uses the freemium model by default. Giving free service tend to make customers devalue your product. Moreover, supporting all of those free users is incredibly expensive. So, instead of a free account, give a limited-time free trial. It could be 7 or 14 days. It doesn’t matter how long you give them; all that matters is that they have enough time to figure out how much value they’ll get from your service.
You should now be able to calculate your monthly recurring revenue using the basic formula given above. It’s important to figure out your MRR, so you can see if your marketing activities are paying off.