Imagine you run a software business that helps other companies manage their inventory. You sign them up for your inventory-management service package, charging them a regular monthly subscription. These payments are your business’s recurring monthly revenue.
Here is what you need to know about this important financial metric, and how you can use it to track and manage your business’s growth and determine your pricing strategy.
What is MRR?
Monthly recurring revenue (MRR) is the amount of money a business receives each month that is continuous and predictable based on customer payment agreements such as subscriptions or contracts. It doesn’t include revenue from one-time sales of products or services. Utilities, internet service providers, and streaming services such as Netflix and Hulu are among the industries that rely on subscriptions for recurring monthly revenue.
Although not a recognized measure under generally accepted accounting principles (GAAP), MRR is widely used by financial analysts and investors to assess a business’s strength and growth rate. MRR helps keep close tabs on short-term performance—particularly for a subscription business. Annual recurring revenue (ARR), which is the regular revenue a business receives each year, aids in long-term analysis and business planning for future revenue growth.
Types of monthly recurring revenue
Monthly recurring revenue often is recorded and classified in the following ways:
New MRR
This is the additional revenue from customer acquisition in a given month. For example, if your business signs up 50 new subscribers for a $500 monthly service plan, new monthly recurring revenue is:
50 x $500 = $25,000
Expansion MRR
Any recurring revenue from existing subscribers that exceeds their regular subscription payments is expansion MMR. Imagine if your business offers an extra service not included in the regular subscription plan for $100 a month. If 25 subscribers sign up for this extra service, your expansion MRR is:
25 x $100 = $2,500
Upgrade MRR
Similar to expansion MRR, this is based on existing subscribers who move up to more expensive plans. Let’s say your business has 200 subscribers on the standard $500 monthly plan, but 20 of them upgrade to a $750 premium plan in a given month, an increase of $250 each. The upgrade MRR will be:
20 x $250 = $5,000
Downgrade MRR
In contrast with upgrade MRR, this represents the decline in monthly recurring revenue from subscribers who downgrade and choose less costly plans. For example, if five premium subscribers decide to drop the $750 plan for the $500 plan, your monthly downgrade MRR, or lost recurring revenue, will be:
5 x ($750 - $500) = -$1,250
Churn MRR
Churn refers to the loss of subscribers; it tracks the revenue decline from subscription cancellations. For example, if your business loses seven standard-plan customers who typically pay $500 a month, the churn MRR loss is:
7 x –$500 = –$3,500
Reactivation MRR
This refers to subscriptions that either lapsed or were canceled and then reactivated. Let’s say that five lapsed customers decide to restart their standard $500 monthly subscriptions. Your reactivation MMR is:
5 x $500 = $2,500
Net new MRR
This is the result of adding and subtracting all the above types of MRR:
Net new MRR = new MRR + expansion MRR + upgrade MRR - downgrade MRR - churn MRR + reactivation MRR
Businesses use net new MRR to gauge their growth rate. So, in summing up the examples above:
Net new MRR = $25,000 + $2,500 + $5,000 - $1,250 - $3,500 + $2,500 = $30,250
Uses for monthly recurring revenue
Monthly recurring revenue is used in several ways. Some financial analysts even consider it more important than total revenue, total revenue growth rate, and other well-known measures. The main uses of MRR include:
Tracking performance
Monitoring recurring revenue every month makes sense for subscription-based businesses that receive customer payments monthly. Month-to-month comparisons help a business spot trends early and gauge its progress toward annual goals. Fluctuations in MRR can help a business identify seasonal trends and assess whether changes in pricing strategy or marketing campaigns are effective.
Forecasting revenue
Using MRR, a business can reliably project sales. Let’s say a business had $100,000 of MRR in June and monthly growth has averaged 5%. In that case, a reasonable MRR projection for July is $105,000 of MRR.
Budgeting
Because MRR predicts consistent revenue by excluding unusual or one-time revenue sources, it can guide a business’s spending for current operations and for expansion. Let’s say a business’s MRR growth for the past two months was mostly attributable to signing up new subscribers, or new MRR. The business could use this information to budget more for sales staff to focus on recruiting new subscribers.
How to calculate total monthly recurring revenue
There are two main ways to calculate monthly recurring revenue:
List method
The simpler way to calculate MRR is simply to list all subscription accounts and the monthly revenue from each account. For example, if your business has 10 subscribers who pay $200 a month for its standard plan, or a total of $2,000, and 10 subscribers for the premium plan at $300 a month, or $3,000. To calculate MRR, add up all revenue:
$2,000 + $3,000 = $5,000
Average revenue per account
The other calculation uses a metric called average revenue per account (ARPA), also called average revenue per user (ARPU). As a first step, you would add up all the revenue for each customer group and divide by the number of customers in the groups, or:
$2,000/10 = $200 and $3,000 / 10 = $300
ARPU is then:
$200 + $300 = $500 / 20, or $250
To calculate MRR from this figure, you would use the following formula:
Total number of users x Average revenue per user = MRR
Or:
20 x $250 = $5,000
ARPU is useful because a business can use it to spot growth opportunities such as selling upgrade plans.
Ways to increase your monthly recurring revenue
You can increase your monthly recurring revenue in several ways, even without expanding your customer base:
Increase prices
Your value proposition to customers is essential in determining your prices. For example, if your product or service has several features that competitors lack, and their monthly subscriptions average $200, you might charge $300 by touting the higher value of your offerings. Instead of one big jump, however, consider smaller, gradual price increases. Customer feedback may guide you in how far to push prices.
Sell more to current customers
You can entice existing customers to buy other products or services, or to upgrade their subscriptions, also known as upselling. Focus on customers with higher household incomes who may be willing to spend more.
Give customers flexibility
Although you always want new customers and hope to upsell current customers, you also can give them choices. This could include different pricing plans, tiers of service with the ability to upgrade when they’re ready, or usage-based plans so less frequent users can limit their costs.
Mistakes to avoid in calculating MRR
Calculating MRR properly is essential. Perhaps the biggest risk is that you overcount, which can cause problems when you’re budgeting and spending. Some common mistakes in calculating MRR include:
- Frontloading. Frontloading means counting full annual subscription values in the month they’re paid. If a $1,200 annual subscriber pays upfront, the $1,200 should be spread across 12 months in $100 increments, rather than lumped into the first month.
- Including non-recurring revenue. Don’t count one-time or infrequent revenue sources in MRR. The point of MRR is to show only regular, predictable revenue such as subscription payments.
- Counting trial subscriptions. Whether paid or free, trial subscriptions provide no recurring revenue unless and until trial subscribers sign up for a regular plan.
- Excluding discounts. You should count only the actual amount of revenue, not the list price. If a subscriber gets a 50% discount on a $100 monthly plan, only $50 goes toward MRR.
Monthly recurring revenue FAQ
What is MRR?
Monthly recurring revenue is the portion of a business’s revenue received on a regular and predictable monthly schedule. For businesses that sell products and services on a monthly subscription basis, MRR makes up most of their total monthly revenue.
What is a good MRR?
No single number determines whether MRR is good or bad. Much depends on the type of market in which the business operates, its development stage, the types of customers it attracts, and customer retention rates. Generally, startups and young companies want to increase MRR faster, as do those that spend heavily on marketing in hopes of gaining new customers.
What is MRR vs. ARR?
MRR is more useful in tracking short-term monthly changes and trends in a business, while ARR helps a business see longer trends and plan strategically for future revenue growth.
