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How to Calculate Monthly Recurring Revenue: Why It Matters and Best Practices
Understanding how to Calculate MRR (Monthly Recurring Revenue) is crucial for any SaaS business aiming for sustainable growth. This comprehensive guide from Zomentum breaks down the importance of MRR, how to calculate it accurately, and best practices to follow. From simplifying forecasting and making data-driven decisions to tracking performance and improving budgeting, this article provides a deep understanding of MRR and its pivotal role in your business's financial health.
Subscriptions are the bread and butter of any software-as-a-service (SaaS) business. Savvy SaaS businesses regularly track customer retention, churn, and other essential metrics, but monthly recurring revenue (MRR) ties directly to SaaS profitability.
A survey by CFO Research found that 40% of organizations have recurring revenue, making MRR one of the most important metrics you can track in your business. However, the same survey found that 48% of SaaS businesses with recurring revenue find calculating MRR for accounting and reporting to be a tremendous challenge.
Read on to learn why it’s important to calculate MRR and how to calculate it accurately for your business.
Why calculating monthly recurring revenue is important
MRR gives you visibility into your business’s financial health. By understanding this sales metric, you’ll know where you need to reallocate or scale your resources, how to reduce churn and improve customer experience, as well as when to launch an acquisition strategy.
When you calculate MRR every month, you help your business achieve the following key tasks.
Simplify forecasting
Recurring payments make it easier to forecast revenue. You can compare your Monthly Recurring Revenue to your average churn rates so you can project the revenue you expect to earn in a given year or financial period. The MRR model helps you understand where your business will be in the future, which is essential for managing cash flow.
Make data-driven decisions
Should you hire more salespeople or move to a bigger office? MRR helps you make data-driven business decisions based on solid projections. This way, you can route your resources to the most valuable initiatives at any time.
Track performance
Calculate MRR to identify trends over time so you can see how your business is performing. Ideally, you want to see MRR trending upward every month as an indicator of growth. If MRR is trending downward, you might need to work on improving your customer experience or adjust pricing. Without tracking MRR, you won’t know how your business is doing.
Improve your budget
Don’t take on more expenses than your business can support. Monthly Recurring Revenue trends indicate when it’s a bad time to spend money. Take educated risks in your business by managing your cash flow carefully with smarter budgets.
How to calculate monthly recurring revenue—with best practices
The simplest way to calculate Monthly Recurring Revenue is to add all your customers’ monthly subscription fees. However, using the wrong data can result in miscalculating your MRR. So, you need to use the right inputs and MRR formula to perfect this metric.
Some businesses prefer to use an MRR formula that doesn’t require individually adding each customer’s monthly subscription. It entails the following steps:
- Calculate your average revenue per account (ARPA), which is the average amount of revenue each account generates.
- Add the total number of paying subscribers for the month.
- Multiply your ARPA by the total number of accounts. For example, if your ARPA is $50 and you have 100 customers, your MRR is $5,000.
Instead of calculating the exact amount per customer, you calculate the average monthly subscription cost.
Because MRR is a deceptively simple metric that’s easy to miscalculate, apply the following best practices.
1. Include the right data
To ensure your MRR examine all of your business’s recurring data, include income from:
- Subscriptions
- Late fees
- Upgrades
- Add-ons
Remember to factor in customer discounts, too. Many SaaS businesses offer discounted subscriptions for new subscribers. Check your sales data to see the number of subscribers that pay a discounted rate and the length of time they pay it.
You can also to track customer churn to anticipate how much MRR you’ll earn in a month based on the number of customers who stay or leave.
2. Don’t include paid trials
Paid trials are also a form of revenue for your business. While you should track trial revenue, don’t factor it into Monthly Recurring Revenue because trial customers aren’t monthly subscribers yet. Many of your trial users won’t convert to a monthly subscription, so don’t include their payments in your MRR.
3. Factor in annual payments
MRR looks solely at monthly revenue and recurring income. If your subscribers pay annually, include those payments as well to ensure an accurate MRR. That is, break down the annual amount into a monthly average. For example, if a customer pays $1,200 in January for one year of service, the MRR is $100 per month.
However, if you don’t want to include annual payments in your MRR, calculate a separate annual recurring revenue (ARR).
Automate your monthly recurring revenue for SaaS
To ensure your business maintains regular income to support operations and stay profitable over time, you need to calculate your Monthly Recurring Revenue. This valuable metric helps you plan your company’s momentum, so you can invest your resources wisely for sustainable growth.
Take the headache out of manually calculating your Monthly Recurring Revenue for your subscription revenue. Automate your subscription billing, and licensing management in one place with Zomentum Connect. Sign up for a demo.
