Monthly recurring revenue (MRR) is the heart of any SaaS operation. When pumping fast it shows business strength, ability to scale, and profitability to potential investors. Business operators need to put time in to ensure MRR is kept at optimum performance. However, your energy might be going to waste if you’re calculating and tracking one of the most important business metrics incorrectly.
What is MRR?
MRR is the net amount of monthly revenue a business generates from its subscribers. MRR is exclusively applicable to any business that has a contractual agreement on a monthly retainer with a customer, such as:
- Software as a service (SaaS)
- Subscription-based business
- Subscription commerce
- Professionals who provide a service on a monthly retainer (lawyer, marketing professional, or accountant).
Why should I bother with MRR?
MRR is a lot more than simply measuring and presenting your revenue.
- When your MRR is increasing month over month, it shows potential investors that you are actively growing and that your business has the ability to scale.
- MRR shows that you’re able to retain customers, as well as acquire new ones.
- Measuring MRR will allow you to accurately measure customer lifetime value (CLV).
- MRR allows business operators to forecast next month’s revenue, which in turn enables them to make smarter business decisions based on data.
All of these points ring true, as long as operators calculate MRR correctly.
How to calculate monthly recurring revenue
Let’s say you’re a small SaaS startup with a handful of monthly subscribers. You’ll want to calculate MRR on a customer-by-customer basis.
For example, Customer A pays $50 per month, Customer B pays $50 per month, and Customer C pays $75 per month. Simply add these amounts together to calculate your business’s MRR, which in this case is $175.
Calculating MRR using the customer-by-customer method produces high levels of accuracy, however, if you’re a slightly larger operation with a higher volume of customers, this method can be time consuming and overly complicated.
A more effective way to calculate MRR is to multiply your total number of paying customers by the average revenue per customer (ARPU).
For example, if your ARPU is $100 and you have 50 paying customers, your MRR would be $5,000.
Why calculate MRR correctly?
In 2004, streaming giant Netflix was sued by its shareholders for allegedly inaccurately reporting the company’s churn rates. The prosecutors argued that the tech company claimed its churn rate in Q3 of 2003 had “reached a record low of 5.2%” when actually it had risen to 7.7%.
Even though the case against Netflix was thrown out of court, it shows that making calculation mistakes — whether you realize them or not — can potentially cost a business both time and money.
Not calculating correctly can also lead to operators making poor business decisions that ultimately affect a business’s long term success. If you’re an operator who thinks they have a higher MRR than you actually do, you may spend more freely, hire more staff, or scale your operation faster than is wise to.
MRR: Common Calculation Mistakes
Don’t fall into the same traps as everyone else and steer clear of these common MRR calculation mistakes.
1. Annual and Quarterly Sales
MRR is all about calculating your recurring revenue and your recurring revenue only. A huge mistake that business operators make is including quarterly or annual payments into their MRR measuring, as was the case for Buffer. In 2014, the social media automation service realized they had been including one-time annual payments in their monthly revenue calculations.
If your business bills customers on a separate annual or quarterly payment plan, you will need to reconfigure this into a monthly amount. For example, if you have a plan that is $299 per year, simply divide this by 12 to get a monthly average. For a quarterly payment plan, divide the total by 4.
2. Trial customers
When calculating MRR, business operators can fall foul of adding trial customers to their calculations. Because these customers aren’t full subscribers yet nor do they pay a monthly recurring fee, it’s advised not to include them. If you do, beware that you’re actively skewing your MRR figures.
Understandably operators want to report the most accurate MRR figure they can. With this in mind some may be tempted to subtract any refunds given from their MRR totals. The downside of doing so is that any refunds are then not monitored and, therefore, unable to be assessed and optimized. It’s recommended that you keep these transactions in your monthly MRR calculation and segment them into a separate cohort for analysis.
4. Other types of sales
If your SaaS business offers customer add-ons, charges a setup fee, or has any other non-recurring features, omit these when calculating MRR. Remember, you want to focus on your guaranteed monthly recurring revenue (i.e. what the customer pays for their subscription) — nothing more, nothing less.
Data entry is a tedious beast. Make one small typo and you’ve suddenly misinterpreted hours of work. For example, adding an extra 0 onto a set of numbers, putting a decimal point in the wrong place, inputting a formula incorrectly can happen when using human calculators and a monthly recurring revenue spreadsheet.
Switching up your measuring method to a dedicated payment analytics service is not only more practical, it tightens the room for error, meaning that your MRR reporting will be accurate each and every time.
Calculating MRR correctly is the cornerstone of any good payment analytics monitoring. The impact that this metric has on the overall health of your business means that operators need to be ensuring complete accuracy at all times — no matter what.
Originally published on the now defunct Control blog.