Get expert advice on measuring Monthly Recurring Revenue (MRR), a crucial metric for SaaS companies. It explains MRR’s importance in forecasting financial stability and growth by detailing calculation methods and different MRR types like New, Expansion, Churned, Contraction, and Reactivation MRR. Strategies to increase MRR, such as upselling and effective use of content marketing, are also discussed, emphasizing the metric’s role in long-term business profitability.
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Metrics are a key element that helps businesses evaluate their performances. One such metric is monthly recurring revenue. Recurring revenue can be the spine of any SaaS company, making a business or company so appealing. One method that makes SaaS companies more comprehensive is calculating monthly recurring revenue and annual recurring revenue. Companies get a long-term view of their financial standing through this calculation.
Software-as-a-service (SaaS) based companies commonly provide subscription-based services. For them, monthly recurring revenue (MRR) is an essential metric that helps companies determine the monthly revenue they can expect from the customers in return for their products and services. By paying close attention to a company’s monthly recurring revenue, a company can easily measure its growth and decline correctly and know exactly where it stands in the market.
What is Monthly Recurring Revenue (MRR)?
It is essential to understand what is mrr. Monthly recurring revenue (MRR) is the monthly income that a company can expect to receive by selling its products and services. Subscription-based SaaS companies often use this metric. MRR can be said to be a standardized measure of a company’s monthly income. MRR is highly beneficial in letting companies know how well they are performing and can also help them predict the upcoming stages of their business.
Companies need to understand and calculate their month-to-month differences in their subscription service’s revenue figures. Companies can also tend to undergo significant loss if, by any means, the monthly recurring revenue figure is miscalculated.
Calculate monthly recurring revenue to track the monthly income generated from subscription-based services or products.
How to calculate Monthly Recurring Revenue (MRR)?
Monthly recurring revenue formula – Calculating monthly recurring revenue is multiplying the total number of active subscribers by the average monthly subscription fee.
Every individual company’s MRR will vary based on its business model. Monthly recurring revenue can be given as follows:
MRR = Average Revenue Per Account (ARPA) x Total Number of Accounts
For some companies, the average revenue per account (ARPA) is replaced with the average revenue per user, and the total number of users replaces the total number of accounts. MRR provides a normalized and smooth view of the revenue, and through MRR, companies can quickly evaluate their growth rate.
Quick Example of Monthly Recurring Revenue (MRR)
Let us take a quick example of any SaaS business with the below-mentioned customers.
Customer Name
Monthly Subscription Amount Paid
Rahul
$20
Meena
$20
Joy
$50
Ekta
$60
Anita
$100
The MRR for the above-mentioned values will be given as follows:
MRR = Average Revenue Per Account (ARPA) x Total Number of Accounts
Where
ARPA is given as
ARPA = Monthly Recurring Revenue / Number of Active Customers (Users)
So, the ARPA here becomes $50
50 (ARPA) * 5 (Total Number of Accounts) = $250 MRR
Types of Monthly Recurring Revenue (MRR)
There are five types of MRR, as mentioned below:
New MRR
New MRR is the revenue that is processed from new customers.
2. Expansion MRR
Expansion MRR is the additional monthly recurring revenue from existing customers. This figure is an upgrade in revenue and is usually a result of an up-sell or cross-sell.
3. Churned MRR
Churned MRR is determined as the revenue lost due to subscription cancellations.
4. Contraction MRR
Contraction MRR is the revenue lost (downgrade) from the existing customers.
5. Reactivation MRR
Reaction MRR is the MRR received from customers who have reactivated using a particular company’s service.
The MRR, as mentioned above calculations creates a baseline for companies and businesses to understand their sustainability, growth, and short- and long-term goals.
Expert tips to increase the company’s MRR:
Upsell, Cross-sell, and Promote.
Monthly recurring revenue is expected to grow when businesses upsell, cross-sell, and promote add-ons whenever possible. Upselling and cross-selling are the two most important terms for SaaS businesses. The most critical factor for successful upselling is reaching out to the right prospects at the right time. Upselling helps a business sell products to customers willing to pay for the upgraded product or service and maximizes the potential revenue that a company is expected to receive from the up-selling efforts.
Creatively split the features
Clubbing all the features under a single plan might bring unwanted trouble. Most clients choose the features independently instead of opting for everything at once. The more segregated the parts are, the better they seem to be. Therefore, SaaS companies must devise an established plan to split the features carefully.
Use Content Marketing to the Fullest
Regular content helps businesses establish brand awareness, directly impacting the MRR. Being active on social media and other content-related platforms allows companies to spread the positive word about their presence. Content marketing improves organic search traffic but also helps improve overall business performance and builds brand trust.
Use Pre-Payment Methods
Customers think a little longer before opting for an annual prepaid plan. Hence, companies need to develop various discount coupons and offer so that customers stay committed for an extended period.
Increase the leads
If a business can calculate the marketing ROI, it will notice a massive lead increase, leading to higher MRR. MRR can be seen as a product obtained from the leads. A decent and well-built marketing strategy will help businesses eventually receive a significant return on investment.
Final TakeAway
One of the most defined ways to amplify a SaaS company’s overall revenue stream is to understand the MRR truly. Calculating and understanding all the dimensions of MRR is not relatively easy, but it is equally important. MRR metric provides all the necessary information needed to gain a brief understanding of the financial insights and, in return, keep the company profitable over the long term. Monthly recurring revenue can be constantly improved by acquiring new customers, building a strong sales pipeline, cross-selling, up-selling, updating the pricing models, and building and putting proactive marketing strategies in the right place.
FAQs
How do you calculate monthly recurring revenue?
The formula for calculating monthly recurring revenue (MRR) is as given below:
MRR = Monthly (ARPR) Average Revenue Per User x Total Number of Monthly Users
Consistency and predictability of monthly recurring revenue (MRR) ensure that a company or a business can easily forecast its future revenue.
What does monthly recurring revenue mean?
Monthly recurring can be the predictable monthly revenue a business generates from all the active subscribers in a particular month. This also includes various charges from coupons, recurring add-ons, and discounts.
Why is Monthly Recurring Revenue important?
MRR essentially measures standardized monthly revenue for the company. Revenue standardization is essential for businesses that offer various pricing tiers for their goods or services. MRR is an average figure for recurring monthly revenue for a business.
Are there any limitations to using MRR as a metric?
Indeed, utilizing Monthly Recurring Revenue (MRR) as a statistic has limits.
Secondly, because MRR only accounts for revenue generated regularly, it may only partially reflect the revenue generated by a company in a given time. One-time sales and project-based revenue are examples of non-recurring revenue sources that need to be recognized in MRR.
Second, MRR makes the unassumable assumption that all consumers will always pay their membership costs. Consumers’ ability to cancel subscriptions or not renew them can affect MRR.
Third, MRR does not account for price adjustments or changes in a customer’s subscription amount, which may influence revenue. For instance, the MRR might not accurately reflect the effects of a consumer upgrading or downgrading their subscription package on income.
The cost of obtaining or keeping consumers, which might affect a business’s profitability, is not considered by MRR. If client acquisition or retention costs are significant, a high MRR may only sometimes indicate a profitable business.
Overall, MRR can be a valuable statistic for tracking the recurring revenue produced by a firm. Still, it’s vital to consider its limits and use them with other metrics to get a complete picture of a company’s financial success.
How can MRR be increased?
You are aware of your MRR and how to calculate it at this point. Here are six recommendations to boost your recurring income:
Generate additional opportunities for upsells
Offer several pricing tiers
Client Retention techniques
Generate additional opportunities for upsells
Offer your clients what they require and generate additional leads and new clients.
What is the difference between MRR and ARR?
Without recurring income, your business can be left to wither away. Annual recurring revenue (ARR) is the annualized amount of predictable revenue your business will produce, just as monthly recurring revenue (MRR) is the amount of predictable money your firm generates monthly from clients.
How is MRR calculated?
MRR calculation is easy. Simply multiply the average revenue per user by the number of monthly users (ARPU). For calculating MRR for subscribers under annual plans, the annual plan price is divided by 12, and the result is multiplied by the number of consumers on the annual plan.
Monthly Recurring Revenue (MRR) is a normalized metric that represents the predictable revenue a company can expect to receive every month from its active subscriptions. Unlike total sales, which can be volatile, MRR provides a clear, consistent measure of financial health and growth momentum, making it essential for accurate forecasting and business valuation.
Calculating MRR correctly is crucial for understanding your company's trajectory. It smooths out irregularities from different subscription terms and one-off fees to give you a true picture of your sustainable income. For a subscription business, this predictability is the foundation for making informed decisions about hiring, marketing spend, and product development. By focusing on MRR, you can assess the direct impact of new customer acquisition, upgrades, and churn on your bottom line each month. The full article explains how this focus helps build a more resilient business model.
Consistently calculating Monthly Recurring Revenue provides leadership with a reliable baseline for tracking progress and predicting future income streams. This metric standardizes monthly income, allowing for the evaluation of growth trends and the health of the subscription model, which is vital for long-term strategic decisions.
The core formula, MRR = Average Revenue Per Account (ARPA) x Total Number of Accounts, serves as the starting point. By tracking this figure month-over-month, you can immediately see the effects of pricing changes, marketing campaigns, or product updates on your revenue. This data-driven approach moves your business from reactive problem-solving to proactive strategy, enabling you to set realistic growth targets and understand your company’s sustainability. Exploring the nuances of MRR calculation can reveal deeper insights into your business's potential.
Both **New MRR** and **Expansion MRR** are critical signals of growth, but they tell different stories about your business's health. **New MRR** demonstrates the effectiveness of your sales and marketing engines in attracting customers, while **Expansion MRR** reflects your product's ability to deliver increasing value, leading to stronger customer retention and higher lifetime value.
While acquiring new customers is always important, a high **Expansion MRR** is often a more powerful indicator of a healthy, scalable business. It shows that your existing customers are satisfied and finding more reasons to invest in your service. Strong expansion revenue means your growth is more capital-efficient, as retaining and upselling a customer is typically less expensive than acquiring a new one. A balanced strategy focuses on both, but a mature SaaS business should aim for significant growth from its existing base. The complete text explores how to optimize for both revenue streams.
While both **Churned MRR** and **Contraction MRR** represent revenue loss, they stem from different customer behaviors and require distinct strategic responses. **Churned MRR** is the total revenue lost from customers who cancel their subscriptions entirely, whereas **Contraction MRR** is the partial revenue lost when existing customers downgrade to a lower-priced plan.
Distinguishing between the two is vital for diagnosing business weaknesses accurately. High churn might indicate fundamental issues with product-market fit, customer support, or competitive pressure. In contrast, high contraction could point to a pricing model that is not aligned with the value customers perceive, or it might mean customers are finding less use for premium features over time. By tracking them separately, you can pinpoint the exact source of revenue leakage and develop targeted strategies, whether it is improving your onboarding process to reduce churn or demonstrating feature value to prevent downgrades. Learn more about mitigating both types of loss in the full analysis.
The example's calculation of $250 MRR from five customers highlights that the **Average Revenue Per Account (ARPA)** is a crucial component metric. While the total MRR gives a top-line view, the ARPA of $50 provides a normalized value per customer, which is essential for evaluating the effectiveness of your pricing tiers and identifying your ideal customer profile.
An analysis of the individual contributions from customers like **Rahul** ($20) and **Anita** ($100) shows a wide variance in subscription value. This variance is key. A rising ARPA over time suggests you are successfully upselling existing customers or attracting higher-value clients. A stagnant or falling ARPA, even with a growing customer base, may signal that you are acquiring lower-value customers or facing downgrade pressure. By tracking ARPA alongside total MRR, you can make smarter decisions about which customer segments to target. The full article shows how to use ARPA to refine your go-to-market strategy.
Looking past the aggregate MRR gives you a dynamic view of your business's health. By categorizing monthly revenue changes, you can understand the drivers behind your growth or decline, which is far more insightful than a single number. This segmentation provides a clear narrative of customer acquisition, expansion, and churn.
For example, if a new customer signs up at the same tier as **Meena** ($20), that contributes to **New MRR**. If **Joy** ($50) upgrades to a higher tier, the additional income becomes **Expansion MRR**. Conversely, if **Rahul** ($20) cancels his plan, that counts as **Churned MRR**. Separating these components allows you to answer critical questions:
* Is our growth coming from new logos or existing accounts?
* Are we losing more revenue to cancellations or downgrades?
* Are former customers returning (**Reactivation MRR**)?
This detailed view helps you allocate resources effectively. Uncover more about building this revenue story in the full piece.
To calculate core Monthly Recurring Revenue, you must first determine two key data points: the total number of active, paying accounts and the average revenue generated per account each month. The formula provides a standardized measure of predictable income, stripping away the noise of one-time fees and varying contract lengths for a clear view of your financial baseline.
The calculation process is straightforward:
1. **Calculate Average Revenue Per Account (ARPA):** Sum the monthly subscription fees from all active customers and divide by the total number of customers. For instance, if total monthly fees are $10,000 from 200 customers, your ARPA is $50.
2. **Multiply ARPA by Total Accounts:** The primary formula is MRR = Average Revenue Per Account (ARPA) x Total Number of Accounts. Using the previous example, the MRR would be $50 x 200 = $10,000.
Ensuring your customer count only includes active, paying subscribers is critical for accuracy. This calculation forms the bedrock of SaaS financial analysis, and the article provides further detail on refining it.
To establish a baseline MRR, a company must first aggregate all revenue from recurring subscription charges for a single month. This simple but powerful exercise creates a snapshot of predictable income, which serves as the foundational benchmark for measuring all future growth and assessing business health.
The process involves these key steps:
1. **Identify All Active Subscriptions:** Create a list of every customer with an active, paid subscription at the end of the month.
2. **Normalize Subscription Values:** For customers on annual or quarterly plans, divide their payment by the number of months in their term to get a monthly value.
3. **Sum the Monthly Values:** Add up the normalized monthly revenue from all active customers. This total is your baseline MRR.
Once you have this number, you can set realistic month-over-month or quarter-over-quarter growth goals. Tracking performance against this baseline reveals the true impact of your strategic initiatives. The full guide offers more tips on getting started with this essential metric.
Consistently tracking MRR and its components transforms financial reporting from a historical record into a predictive tool. By analyzing trends in metrics like **Contraction MRR** (revenue lost from downgrades), a business can identify early warning signs of customer dissatisfaction and forecast future revenue more accurately, allowing for proactive strategic adjustments.
For example, a sudden spike in **Contraction MRR** may indicate that a recent price increase was poorly received or that a competitor has launched a compelling, lower-priced alternative. By catching this trend early, your customer success team can intervene with at-risk accounts, gather feedback, and potentially prevent further downgrades or outright churn. This forward-looking analysis enables you to model different financial scenarios and build a more resilient, customer-centric roadmap. Delve deeper into these forecasting techniques in the complete article.
A consistent increase in **Reactivation MRR**, which is revenue from previously churned customers returning to a paid plan, is a powerful signal of brand loyalty and effective win-back strategies. This trend demonstrates that your product remains valuable even after a customer leaves, creating an opportunity for sustainable, low-cost growth over the long term.
This specific metric validates the investment in email campaigns, special offers, and product updates aimed at former users. As **Reactivation MRR** grows, it proves the ROI of these efforts and justifies allocating more of the marketing budget toward re-engagement instead of focusing exclusively on expensive top-of-funnel acquisition. A strong reactivation rate indicates you have built a product that customers miss, which is a key indicator of a durable market position. Explore how to build effective win-back funnels in our detailed guide.
Miscalculating MRR can lead to disastrous business decisions, as it creates a fundamentally flawed view of your company's health and growth prospects. Overstating MRR can cause you to over-invest in hiring and marketing, leading to cash flow crises, while understating it can result in missed growth opportunities and an inaccurate company valuation, making it a critical risk to financial stability.
Segmenting MRR into its core components is the solution. By tracking **New MRR**, **Expansion MRR**, and **Churned MRR** separately, you create a system of checks and balances. For example, if your total MRR is flat, segmentation can reveal whether this is due to high churn canceling out strong new sales—a major red flag hidden by the aggregate number. This detailed approach prevents critical errors and provides the clarity needed for sound strategic planning. The full article outlines common calculation pitfalls and how to avoid them.
The core problem MRR solves is revenue unpredictability. By design, it normalizes income into a consistent monthly figure, smoothing out the peaks and valleys caused by customers on quarterly or annual billing cycles, as well as non-recurring charges like setup fees. This creates a stable, predictable baseline that is essential for making confident financial and operational decisions.
Without MRR, a company might mistake a month with many annual renewals for exceptional growth, leading to poor resource allocation. MRR provides a true “apples-to-apples” comparison of performance from one month to the next. This clarity is crucial for everything from managing cash flow and setting budgets to securing investor funding, as it demonstrates the underlying health and momentum of the subscription base. Understanding this foundational metric is the first step toward building a more robust financial strategy, as explored further in the article.
Manjusha Karkera is an enthusiastic content marketer who has created numerous engaging and compelling writing pieces for various clients and companies over the years. She enjoys writing pithy content and copy on various sectors like fashion, beauty and wellness, sports, fitness, education, etc. Prior to Team upGrowth, she worked as a Marketing Communications Specialist. Her overall experience includes all forms of content writing and copywriting.
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