A financial indicator known as monthly recurring revenue (MRR) displays the money that a business anticipates receiving every month from consumers in exchange for supplying them with services or products. It essentially gauges standardized monthly revenue for the firm. Revenue normalization is essential for businesses that provide various price tiers for their goods or services. It is frequently employed by Software-as-a-Service (SaaS) businesses that make money via subscriptions.
Investors continue to track monthly recurring revenue even if accounting regulations like GAAP or IFRS do not authorize it. The month-to-month trend allows Investors to assess a company’s growth immediately. As a result, the measure is often included in the annual and quarterly reports of publicly traded firms that employ a SaaS business model.
The monthly recurring revenue (MRR), or the company’s monetizable user base, is the sum of subscription-based income SaaS firms may expect to earn every month through their registered users. MRR is a particularly important KPI to monitor when assessing the growth profile and economic viability of SaaS and subscription-based businesses.
Making projections more accurate by calculating monthly recurring revenue gives a more thorough knowledge of the sustainability of a business’s expected income and user progression. A business’s weak areas can be found by examining previous patterns, allowing management to make the necessary modifications to support future development.
The simplest method to get MRR is to multiply the average revenue per user (ARPU) for a month by the overall number of users during that month. You can even use average revenue per account (ARPA) instead of average revenue per user (ARPU).
It is critical to make sure that only recurring income—which excludes one-time fees—is utilized and not total revenue. It should also only include accounts that are active and paying, not those who have merely signed up for free trials.
Once you are aware of your MRR, you will want to compute the MMR growth. To do this, divide the aforementioned parts into groups like New MRR, MRR via Add-ons, and Churn MRR.
The average revenue per user (ARPU) for the month is multiplied by the total number of customers for the specified month to get monthly recurring revenue. Therefore, the formula is.
Here, Average Revenue Per User (ARPU) = Sum of Recurring Revenue / Sum Active Users
If you use Average Revenue Per Account (ARPA) instead of ARPU, then,
Average Revenue Per Account (ARPA) = Sum of Recurring Revenue / Sum Active AccountsThe MMR growth, which includes both gains and losses, is used to modify the preceding month’s MRR for new MRR, MRR via add-ons, and MRR churn. The formula for this is:
Growth MRR = (New MRR + MMR via add-ons) – MRR churn.
Let’s use an example to understand the calculations.
Say a B2B SaaS company named QPR offers a subscription-based plan for a product costing $24,000 annually per user. First, to understand the revenue every month, divide the number by 12.
Therefore, the Average Revenue Per User monthly (ARPU)= $24,000 / 12 = $2,000
Say QPR has 100 active users in January; then the Monthly Recurring Revenue will be:
Monthly Recurring Revenue (MRR) = Monthly ARPU x Total number of Active monthly users
Here, Monthly ARPU = $2,000
Total number of Active monthly users = 100
Therefore, MRR for January = $2,000 x 100 = $200,000
In February, QPR had 150 active users at the end of February, and 20 of the previous users upgraded for an add-on that cost annual fees to spike by $360. Additionally, 10 previous users downgraded their service to pay $600 less yearly.
Let’s calculate growth MMR with this information:
Growth MRR = (New MRR + MMR via add-ons) – MRR churn
So, The New MMR for February = Monthly ARPU x Total number of Active monthly users
Here, monthly ARPU = $2,000
Total number of Active monthly users = 150
Therefore, New MMR = $2,000 x 150 = $300,000
Now the add-on MRR = Monthly ARPU for add-on x Total number of Active monthly users with add on
Here, Monthly ARPU for add-on = $360 / 12 = 30
Total number of Active monthly users with add-on = 20
Add-on MRR = $30 x 20 = $600
Now the MRR Churn = ARPU lost x Number of active monthly users lost.
Here, ARPU lost monthly = $600 / 12 = $50
Number of active monthly users lost = 10
MMR Churn = $50 x 10 = $500
With all the information, Growth MRR = $(300,000 + 600) – $500 = $300,100