Blog / LearnWednesday, January 1, 2020

What is MRR? A Simple Guide to Calculating MRR and Its Importance

Lasse Rønn

What is MRR? A Simple Guide to Calculating MRR and Its Importance

What is MRR?

MRR is monthly recurring revenue. It’s the amount of money your business can reliably expect to make each month.

If you sell your SaaS service on a subscription basis, then MRR is going to be a key metric for you to work with.

One of the main benefits of operating your SaaS business with a subscription model is that you lock-in recurring revenue without needing to go out and make a sale for every dollar that comes into your company. Operating a subscription model gives some level of predictability to your revenues and looking at MRR is what will help you to understand how you’re doing.

Why is MRR Important?

MRR can be used as a key health indicator for your business. As well as being ideal for creating an internal predictive revenue model, you can also use this to plan for future investment activity, and even for targeting external investments if this is a strategy you plan to pursue.

Given the detailed level to which MRR gives you an insight into your business, you can also use it to assess the performance of specific individuals and departments, and how the relationships between these might impact on your business performance.

Perhaps the biggest benefit of using MRR is that it encourages your whole business to focus on customer relationships. From a sales and marketing perspective, how does your business initiate and begin relationships on a positive footing to achieve positive MRR growth? From a customer service perspective, how good is your product or service, as well as your “hands on” levels of service, in order to ensure customers are retained and, over time, perhaps cross-sold another product or upsold into another pricing tier?

How to Calculate MRR

The simplest way to calculate MRR is to multiply your number of customers by the average amount paid per month.

Simple MRR Formula:

MRR = Number of customers x Average Amount Paid Per Month

For example, if you have 100 customers, who on average pay $50 a month to use your SaaS platform, your MRR would be $5,000.

Most SaaS businesses will have a range of pricing options, while some customers may pay monthly with others paying annually. If you offer “Enterprise” solutions, then you might even sell your services outside of your public domain pricing model and have a range of customers paying completely different amounts based on what your sales team was able to negotiate.

Even if you have customers who pay annually, or pay a full contract cost upfront, you may still want to equalise this so you can account these numbers within your MRR calculations.

To do this, all you need to do is divide the cost by 12, for annual subscribers, or by the number of months in a contract, for anyone outside of this. Within these, you may still have different pricing tiers depending on your business model. Once you have broken down all your revenue to be expressed as a monthly amount, you can calculate your MRR.

 

Your final calculation might look something like the below.

Simple MRR Working Example:

10 customers who pay monthly in Tier 1 x $50 per month = $500

10 customers who pay monthly in Tier 2 x $1000 per month = $1,000

5 customers who pay annually in Tier 1 = (5 x $400 per year / 12) = $166.66

1 customer who signed up with a three-year contract = $1,500 / 36 = $42

Total Effective MRR = $1,708.66

 

When you have aligned your numbers, so you know a monthly value for each customer or contract, viewing your MRR is easy. As you build your MRR prediction model you will also be able to see where MRR is dropping if customers subscriptions are due to lapse and focus your efforts on retention or upselling as necessary.

Let’s look at three other MRR calculations you can use to give you an even more detailed picture of your business’ health.

 

Calculating MRR From New Customers

Being able to calculate the MRR you earn specifically from new customers over a given time is a great way to measure the effectiveness both of your marketing and your sales teams.

As with the calculation we did above, you would just need to work out any annual or longer-term sign-ups monthly equivalent before doing this. In the formula below, we have kept it simple with two different calculations within the wider MRR equation, but you can add as many as you need to.

 

Calculating MRR From New Customers Formula:

New MRR = (Number of New Customers in Tier x Amount Paid per Month) + (Number of New Customers in Tier x Amount Paid per Month)

 

We’ll keep the numbers the same as above for this working example, with customers paying monthly and joining either Tier 1 or Tier 2 of our hypothetical SaaS business.

 

Calculating MRR From New Customers Working Example:

New MRR = (10 x $50) + (10 x $100)

New MRR = $500 + $1,000

New MRR = $1,000

Calculating MRR From Cross-Selling or Upselling

As well as calculating your MRR from new customers, it is also worth calculating what portion of your MRR is from existing customers that you have cross or upsold to.

Calculating MRR from Cross-Selling or Upselling Formula:

Cross and Upsell MRR = Number of Customers Cross or Upsold (Increased billing amount – Previous billing amount)

For the working example below, we have assumed that 5 customers move from our $50 tier to our $100 tier.

 

Calculating MRR from Cross-Selling or Upselling Working Example:

Cross and Upsell MRR = 5($100 – $50)

Cross and Upsell MRR = 5 x $50

Cross and Upsell MRR = $250

Calculating Churn MRR

Calculating your churn MRR is simply the opposite of your cross-selling or upselling MRR.

Your churn MRR will come from customers who either cancel their services completely, or downgrade to a different pricing tier.

As with the above calculation, you can add to this equation as you need to depending on how many different plans you have. We hope however that you won’t be doing too much to calculate how much business you’re losing because you’re doing so well!

Calculating Churn MRR Formula:

Churn MRR = (Number of Customers Cancelling x Monthly Payment) + Number of Customers Downgrading(Previous billing amount – New billing amount)

 

For the working example below, let’s assume 5 customers drop from our Tier 2 to Tier 1, and another 5 customers in Tier 2 cancel.

Calculating Churn MRR Working Example:

Churn MRR = (5 x $100) + 5($100 - $50)

Churn MRR = $500 + 5($50)

Churn MRR = $500 + $250

Churn MRR = $750

 

Full MRR Growth Analysis

For your final MRR calculation, you can combine the last three results to give you a net MRR growth figure.

Calculating MRR Growth Formula:

MRR Growth = New MRR + Cross/Upsell MRR – Churn MRR

We’ll add the numbers from our own calculation in our final working example below.

 

Calculating MRR Growth Working Example:

MRR Growth = $1,000 + $250 - $500

MRR Growth = $750

 

We can see therefore that our MRR growth for the hypothetical period analysed is $750. If you were calculating this each month, you could then start to look at how you can achieve MRR growth beyond this figure, and also look at what has happened if growth starts to slow, or if your MRR starts to shrink rather than grow.

How to Increase MRR

At some point, every business will experience the feeling of making heavy investment into sales, marketing, team training, and various other aspects of their organisation, without seeing the metaphorical revenue needle move at all.

You might just be unlucky, or you might not be focusing on the right things across the board.

Let’s look at a handful of things you might want to try to increase your MRR.

Increase the Price of Your SaaS Product

How much is a monthly or annual subscription to your SaaS service? What do you sell tailored enterprise packages for?

The reality is that your SaaS solution is probably under-priced.

What specific problem does your SaaS platform solve? How much time does it save a business each month? Put the answers to both those questions together, and you’ve highlighted the value your platform offers.

Now let’s look at the economics of it.

If your customers – users of your platform – pay their employees, on average, $15 an hour, and your platform reduces workload by even 10 hours a month, that’s $150 of value you’ve saved.

If you’re pricing your platform at $50 a month, you’re under-priced!

The fear of a price increase turning customers away is understandable but try it and see what happens. You can keep existing customers on their current pricing for a fixed time – or even for as long as they remain a subscriber – but take an honest look at your pricing and ask if you’re underselling yourself.

Upsell to Existing Customers

We’ve already looked at how to calculate the value of your upselling and cross selling activity in terms of MRR.

This is a key opportunity for you to grow your MRR! If you’re using tiered pricing in your business and have different subscription levels that unlock additional features, what additional value can your customers enjoy if they move up to the next level?

In addition to upselling within your SaaS platform, if your business offers additional produces or services, you could upsell and cross-sell these, too. You could even sell your customers onto another SaaS product offered by a partner and pick up an affiliate fee for the revenue! Every dollar helps when it comes to growing your MRR.

If You Have a Free or Freemium Version of Your SaaS, Scrap It

Saying something is “Free” is a fantastic marketing tool to increase digital footfall to your SaaS platform.

However, if you’re offering more than a free trial, like having a “free for life” version of your platform, where is the value in that for your business?

Your customers will, by default, come to see your SaaS platform as not being worth anything, and they’ll simply never spend any money with you. In fact, they’re more likely to one day subscribe to a competitor who doesn’t offer a free version and whose platform probably isn’t much better than yours!

Don’t offer free or freemium, limited versions of your SaaS tool.

Instead, offer a limited time free trial, which gives users full use of your platform. This allows them plenty of time to see the solutions and value you provide, and if you have a great SaaS platform, they’ll be more than happy to proceed onto a paid billing subscription.

Don’t Offer Anything “Unlimited”

In much the same way that being “Free” can be a fantastic marketing tool, it can be tempting to offer something “Unlimited” within your top tier.

The logic behind doing this is sound enough. Usually, businesses that offer something “Unlimited” in their top tier will offer the same thing in a high volume in the tier below. They’ll believe that enough customers will be tempted by the “Unlimited” tag to pay the higher amount, even though they’ll rarely use many more than they would have done in the tier below.

What these businesses don’t consider is what happens if a customer has the workload to make use of an “Unlimited” offer. At some point, you’ll hit a number where you’re making a loss on the resource that customer is using. Thus, you’re capping your own earnings potential.

Instead of offering “Unlimited”, offer your different tiers like you normally would, and then introduce your “Enterprise” offer with custom pricing. When you sell this, you can build in a reverse price escalator so the more resource “power users” consume, the price and thus value for them reduces, while you still make a profit and grow your MRR.

A Real-Life Example of MRR with Amazon Prime

Let’s finish with a real-life example of MRR with Amazon Prime.

In the United States, an Amazon Prime subscription costs $12.99 per month, and has a reported 101million members.

While some of those members will pay annually to enjoy a discounted price, for the purposes of this calculation let’s assume they all pay monthly.

 

Amazon Prime’s MRR would therefore be: 

$12.99 x 101,000,000 = $1,311,990,000

It is also reported that Amazon Prime members spend an average of $1,300 per year shopping on Amazon. If we break this down to express it as a monthly figure, we can see that, per customer:

$1,300 / 12 = $108.33 per month, per customer

We can then calculate this for all customers:

$108.33 x 101,000,000 = $10,941,330,000 per month

We can then add these figures together to get an idea of Amazon Prime’s MRR in the United States:

$1,311,990,000 + $10,941,330,000 = $12,253,320,000 MRR for Amazon Prime in the United States.

How to Work with MRR in Upodi

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