Are you looking to calculate monthly recurring revenue to grow and stabilize your subscription-based business? If so, understanding and accurately calculating your Monthly Recurring Revenue (MRR) is crucial.
After all, it is a key metric that provides insight into revenue growth and customer behavior. MRR has become a vital metric that entrepreneurs, business owners, and investors diligently track and optimize to drive their organizations forward.
In this guide, we will explore the meaning and benefits of MRR, its types, how it relates to other key metrics, and strategies to increase your MRR in 2023.
Whether you’re a SaaS (Software as a Service) provider, a membership-based organization, or a subscription-based business embracing the recurring revenue model, understanding and effectively managing MRR can unlock a wealth of opportunities.
Understanding MRR: definition and importance
What is monthly recurring revenue?
Monthly Recurring Revenue (MRR) is the predictable monthly revenue generated by a subscription business from its current customers. Think of it as the average revenue or regular income a business can count on each month, derived from customers who subscribe to their products or services on a recurring monthly basis only.
It is the lifeblood of businesses that operate on recurring revenue models as it offers a reliable stream of income that supports sustainable growth.
MRR is also an indicator of a subscription business’ current financial health. It provides insights into revenue growth, customer behavior, and overall business performance. MRR is also correlated with other key metrics which can help assess the performance of your business.
Why is MRR important?
MRR holds immense importance for businesses embracing the subscription-based business model. Here’s why MRR should be on your radar:
- Predictability and stability: This is something that businesses relying on one-time sales or sporadic revenue streams often lack. By establishing a reliable monthly income and cash flow, MRR allows businesses to forecast and plan their resources, investments, and growth strategies with greater confidence. Tracking MRR can help you predict future revenue, identify growth patterns, and make strategic decisions on product development, human resources, and marketing strategies.
- Financial health and valuation: Investors and stakeholders closely monitor MRR to measure business stability and growth potential. A robust MRR not only boosts investor confidence but can also enhance your company’s valuation during funding rounds or acquisition discussions. In short, the better your monthly recurring revenue is, the more opportunities for growth there are.
- Sustainable growth: Building a strong MRR foundation is crucial for sustainable growth. As you focus on acquiring and retaining customers on a recurring basis, your MRR grows steadily over time, creating a stable revenue stream that can fund your business’s expansion, product development, and customer acquisition efforts.
Types of MRR: Yes, there’s more than one.
There are different types of monthly recurring revenue. Each type provides insights into different aspects of a business’s revenue growth and customer behavior.
While MRR by itself already provides a ton of valuable insights, it’s also important to track the different types of MRR depending on your business goals.
Breaking down MRR into its components can help you better understand your business’s growth trends to identify improvement areas.
What is it? It is the additional revenue generated from new subscribers in a given month
What is it for? New MRR or additional MRR basically gives you an idea of the value you’re getting from your new customers. If you do decide to focus on acquiring new customers, keeping an eye on your New MRR will give you clear insights into whether your strategies are working or not.
Increasing your New MRR can contribute significantly to the growth of your business. It is a financial game-changer, offering dependable cash flow that can be leveraged for future planning and projects.
What is it? Expansion MRR is the additional monthly recurring revenue generated from existing customers through add-ons, upsells, or upgrades.
What is it for? This type of MRR lets you know if your customers with active subscriptions are getting more value from your business. When your Expansion MRR is on an upward trend, it means your customer retention game is strong. Your existing subscribers are more than just satisfied with your brand or service—in fact, they keep soaking up what you have to offer.
The Expansion MRR highlights the importance of nurturing existing customer relationships by offering additional value to retain and grow your existing customer base further. By focusing on the Expansion MRR, businesses can maximize the customer lifetime value of existing customers and ensure long-term success.
What is it? It is the amount of monthly recurring revenue that is lost as deferred revenue as a result of customer cancellations or downgrades.
What is it for? Monitoring churn MRR will help businesses know when to take proactive measures to reduce customer churn. If churn MRR is increasing, then it’s a cause for alarm. You have to dig deep and pinpoint the reasons why customers are unsubscribing.
By understanding the reasons behind customer churn and implementing strategies to address these issues, businesses can improve customer satisfaction and minimize the loss of overall MRR, leading to a healthier and more stable business.
What is it? It refers to the average monthly revenue generated from previously churned subscribers who reactivated. This also includes people who involuntarily churned due to failed payments.
What is it for? Tracking Reactivation MRR gives you insights into whether your customer win-back campaigns or failed payment recovery strategies (if any) are working. This type of MRR can be advantageous in boosting the total MRR of subscription businesses everywhere/
By focusing on reactivating churned customers and understanding their needs, businesses can enhance their products and services, ultimately increasing MRR and fostering growth.
What is it? Net New MRR refers to the total new MRR your business had by acquiring new customers and keeping existing ones.
What is it for? The NetNew MRR basically shows how much a company’s revenue grew (or shrunk) compared to the previous month. Positive Net New MRR indicates healthy growth, while negative Net New MRR suggests a decline in recurring revenue.
Calculating MRR: Methods and common mistakes
Accurate calculation of MRR is essential for understanding the health of a business. Additionally, it’s important to avoid common mistakes in calculating it. Wrong calculations will lead to misinformed insights and strategic decisions.
How do you calculate MRR for startups?
The MRR formula is as follows: Average revenue per customer (monthly) x Total number of subscribers
For example, if there are ten subscribers on a $100 monthly subscription plan, you would multiply $100 by 10. The MRR will be $1,000.
Common mistakes when calculating MRR
The monthly recurring revenue is a crucial metric, so it’s very important to get the numbers right. However, there are common mistakes that need to be avoided to ensure your MRR calculation is reliable and stable.
Most of these common calculation mistakes that happen when businesses calculate MRR involve including some costs and transactions such as:
- Expired subscriptions – These should be removed right away from MRR calculations. Some businesses do this late, so the company’s MRR calculations end up including revenue that wasn’t generated.
- Multiple packages or tiers – Some subscription businesses have different packages. Foe example, a SaaS business usually has packages of different prices. It’s recommended to calculate MRR separately for these packages so you can track how much revenue each one is generating.
- Non-recurring payments – When a subscription business receives a one-time payment as their only sale for the month, that should not be indicated as a change in MRR.
By avoiding these mistakes, businesses can ensure they have an accurate understanding of their MRR and make better-informed decisions for growth and success.
MRR’s relationship with other key metrics
MRR, while useful and valuable on its own, is even more insightful when calculated alongside other equally important key metrics. That way, you can get a comprehensive understanding of a business’s performance and growth potential. Aside from tracking annual recurring revenue to get the bigger picture, here are other metrics to track:
MRR and CAC
Customer Acquisition Cost (CAC) is the cost of acquiring a new customer. When analyzed together with MRR, these two metrics help businesses evaluate if their customer acquisitions are getting somewhere.
By monitoring the relationship between MRR and CAC, businesses can adjust their strategies to acquire new customers more cost-effectively. This can ultimately lead to increased revenue and growth.
MRR and CLTV
MRR and CLV (Customer Lifetime Value) provide insights into the long-term value of customers and help identify profitable customer segments. When businesses understand the relationship and the dynamic between MRR and CLV, businesses can make more informed decisions about which customer segments to target. Then they can allocate resources more effectively.
MRR and churn rate
MRR and customer churn rate help businesses understand customer retention and identify areas for improvement to reduce churn and increase revenue. By tracking churn rate and churn MRR alongside MRR, businesses can take proactive measures to retain customers, improve satisfaction, and ultimately increase their MRR.
Strategies to increase your MRR in 2023
Once you have a solid understanding of Monthly Recurring Revenue (MRR) and its importance, it’s time to explore effective strategies to boost your future revenue.
Here are some key strategies that can help you maximize your MRR potential in the year 2023 and beyond:
Pricing strategy optimization
Effective pricing is a cornerstone of maximizing MRR. Pricing strategy optimization basically means getting the price right for your product or service so you can maximize your revenue potential.
Here are some tips on how to optimize the pricing strategy for your subscription business:
- Conduct market research: Understand your target audience, look into your competitors’ pricing, and identify pricing trends in your industry. By understanding what customers are willing to pay and adjusting pricing accordingly, businesses can maximize revenue while maintaining customer satisfaction.
- Segment your offerings: Consider creating tiered pricing plans that cater to different customer segments, allowing for scalability and accommodating diverse needs.
- Test and iterate: Experiment with different pricing models, such as flat-rate pricing, usage-based pricing, or value-based pricing. Continuously evaluate and refine your pricing structure based on customer feedback and market dynamics.
- Consider bundling options: Offer bundled packages that combine multiple products or services, providing added value to customers while increasing your overall MRR.
- Implement dynamic pricing: Utilize dynamic pricing strategies to adjust pricing based on factors such as demand, seasonality, or customer behavior, optimizing revenue opportunities.
Upselling and cross-selling
Upselling and cross-selling can generate additional revenue from existing customers. These strategies focus on encouraging paying customers to either upgrade their subscriptions or purchase additional products/services effectively increasing revenue.
Here’s how you can leverage these strategies:
- Understand customer needs: Take a deep dive into your customers’ usage patterns, preferences, and pain points. This knowledge will enable you to identify upselling and cross-selling opportunities that will offer real value to them.
- Personalize recommendations: Tailor your upsell and cross-sell offers to each customer’s specific needs. Don’t forget to highlight the value and benefits of the higher-tier options or complementary products/services.
- Offer incentives: Provide limited-time discounts, exclusive features, or extended trial periods to incentivize long-time customers to upgrade or add-on to their existing subscriptions.
- Automate suggestions: Implement intelligent algorithms or recommendation engines that suggest relevant upgrades or complementary offerings based on customer behavior and preferences. That way, the suggestions come at the right time when they need it the most.
- Train your sales/customer support teams: Equip your sales and customer support teams with the knowledge and skills to effectively communicate upsell and cross-sell opportunities. That way, they can guide customers toward higher-value options while prioritizing the entire customer experience.
Retaining existing customers is crucial for maintaining a strong MRR foundation. By prioritizing customer satisfaction and loyalty, you can reduce churn and foster long-term relationships—ensuring a stable MRR month after month.
- Enhance onboarding experience: Provide a seamless onboarding process, offering resources, tutorials, and dedicated support to help customers get the most out of your product or service from the start.
- Foster proactive communication: Regularly engage with your customers through personalized emails, newsletters, or in-app notifications. Keep them informed about product updates, new features, and upcoming promotions. Form relationships with them because communication and engagement should not stop after they’ve already subscribed.
- Offer exceptional customer support: Ensure prompt and efficient customer support channels, including live chat, email, or phone support. Address customer queries and concerns swiftly, showing your commitment to their success.
- Implement loyalty programs: Reward loyal customers with exclusive benefits, discounts, or early access to new features. Encourage referrals and incentivize customers to advocate for your brand.
- Leverage customer feedback: Collect and analyze feedback to identify areas for improvement. Actively address customer pain points and iterate on your product/service based on their input.
- Implement a dunning system or failed payment recovery system. In case of involuntary churn, having these systems in place can help mitigate the losses and recover lost revenue.
Remember: An effective customer retention strategy can be a game-changer for businesses looking to increase their MRR in 2023.
Diversifying revenue streams
Diversifying revenue streams by expanding product offerings can increase MRR and provide even more stability for your business.
By offering additional products or services that complement your core offering, businesses can tap into new markets, reach a broader audience, and generate increased revenue.
By diversifying your company’s recurring revenue streams, you can reduce dependency on a single source of MRR and create a more resilient business model.
Consider the following strategies:
- Expansion into new markets: Identify untapped customer segments or geographical markets that align with your offerings. Customize your product/service to cater to their specific needs and launch targeted marketing campaigns to reach these new audiences.
- Offer complementary products or services: For example, if you provide a software product, consider offering training or consulting services to enhance the customer experience and generate additional revenue.
- Licensing and partnerships: Explore partnerships with other businesses or licensing opportunities where you can leverage your expertise or intellectual property to generate recurring revenue. This could involve white labeling your product/service for other companies or partnering with resellers and distributors.
- Subscription tiers and add-ons: Introduce different subscription tiers that offer varying levels of features or exclusive benefits. Additionally, consider offering premium add-ons or modules that customers can purchase to enhance their experience.
- eCommerce or marketplace integration: If applicable, explore the potential of integrating eCommerce capabilities or creating a marketplace where customers can purchase related products or services from third-party vendors. This can open up additional revenue streams through commissions or transaction fees.
Master the MRR and achieve the path to subscription success
Remember, a successful business is one that continually adapts and evolves, and MRR is a key metric in guiding that growth. Understanding what MRR means for your business is a game-changer in the subscription world.
To sum up, increasing MRR is an ongoing process that requires continuous evaluation, adaptation, and innovation.
Stay attuned to market trends, customer needs, and emerging opportunities to optimize your MRR and drive sustainable growth.
At Recover Payments, we understand the importance of MRR for businesses like yours. Our team of experts is ready to assist you in driving sustainable growth and achieving your business goals. Don’t miss out on the opportunity to unlock your MRR potential. Reach out to us now!