Running a successful subscription company requires consistent management and monitoring of business performance. From customer acquisition and conversion rate to revenue, there are many different aspects of subscription management.
Fortunately for subscription merchants, several metrics exist that measure and quantify the effectiveness of subscription-based business models. Some of these metrics focus on subscription billing, while others are revenue-related.
Monthly recurring revenue (MRR) is one of the key metrics measuring subscription revenue. By calculating it, an organization can gain valuable insight into their company's sales.
Read on to learn what monthly recurring revenue is, how to calculate it, and its importance to understanding subscriber behavior.
What Is Monthly Recurring Revenue?
Monthly recurring revenue is a financial metric that estimates the monthly revenue generated from all current customers. MRR is the sum of all recurring charges, applies discounts, coupons, and add-ons, while excluding one-off fees.
With MRR, you can forecast future earnings and assess whether sales are increasing or decreasing over the previous month. Subscription companies can extrapolate valuable trends from MRR over a period of time, which is why it is a commonly used metric within the industry.
Why MRR Is Significant For a Subscription Model Business
MRR can help your subscription-based company accurately predict its revenue potential while accounting for factors like customer retention. In addition, MRR provides three valuable benefits for subscription businesses:
- Financial performance tracking: The subscription business model results in small amounts of monthly revenue for each customer. As a result, these companies need a tool to ensure they generate consistent cash flows. By tracking sales trends and providing monthly insights, MRR helps you assess your financial performance and set goals for business growth.
- Revenue forecasting: MRR is a necessary component for making sales projections. An MRR analysis allows you to anticipate next month's revenue and make better decisions about sales strategies.
- Budgeting: MRR estimates how much monthly revenue your business will generate. This information helps to present an accurate picture of a company's financial health and results in more reliable reinvestment plans. MRR data can also help you determine which areas of spending should increase or decrease.
How To Calculate MRR: An Easy Formula
If you're wondering how to calculate monthly recurring revenue, the answer is a simple formula. The calculation involves multiplying the number of monthly customers by the average subscription amount.
# of Monthly Customers x Average Subscription Price = MRR
For example, a software company offers its software as a service (SaaS) product for $150 per month. The business provides no other subscription services and has 1,000 monthly subscribers. Their MRR will be:
1,000 Monthly Customers x $150 Subscription = $150,000 MRR
The above calculation is for subscription-based companies offering a monthly subscription. For a business with an annual subscription, the formula is slightly different. In this scenario, divide the subscription price by 12 before multiplying by the number of customers.
For example, a company that bills its customers $600 per year would use $50 per month when calculating its MRR.
How MRR Sheds Light on Subscriber Behavior
MRR offers insights into subscriber behavior by establishing a correlation between subscribers and their accounts.
An increasing MRR indicates growth in profits. While many factors can contribute to these gains, the most common causes are:
- An increase in new subscribers (customer acquisition)
- Account upgrades for existing customers
- A combination of both
When your company experiences a decline in MRR, it usually indicates downgraded accounts, canceled subscriptions, or increasing churn. A sharp decrease in MRR suggests a business could face an imminent financial calamity.
To understand the causes behind a rising or falling MRR, you must identify the factors that can impact this metric. These factors are traceable by looking at different types of MRR. There are four main types:
- New MRR: This MRR measures the revenue generated from new customers.
- Expansion MRR: Expansion MRR estimates the revenue generation from existing subscribers who upgrade their subscriptions.
- Contraction MRR: This MRR predicts revenue declines due to subscription downgrades and cancellations.
- Churn MRR: Churn MRR highlights the total amount of lost revenue from customers terminating their subscriptions.
As you can see, each of these MRR types (and others) offers distinct insights into customer behavior.
4 Important Calculations Influenced By MRR
For subscription-based businesses, MRR is valuable for monitoring revenue and customer success. In addition to its independent benefits, MRR is also influential in calculating several other important financial metrics.
Average Revenue Per User
Revenue per user (ARPU) measures the amount of revenue generation for every active subscriber. Calculating RPU monthly allows subscription companies to understand how much the average customer is spending on its product or service.
Like MRR, the calculation for ARPU is straightforward. Divide your MRR by the number of active customers.
ARPU = MRR / # of Active Users
For example, a business with an MRR of $20,000 and 50 customers would calculate its ARPU as follows:
$20,000 MRR / 50 Active Users = $400 ARPU
Annual revenue, or annual recurring revenue (ARR), predicts the amount of subscription revenue a company generates in one year. Businesses often use ARR and MRR interchangeably, with ARR being the annualized version of MRR.
To calculate ARR, take your MRR and multiply it by 12.
ARR = MRR x 12
In the previous example, the business with an MRR of $20,000 would have an ARR of $240,000.
Calculating MRR and analyzing its historical data allows subscription businesses to make easy and accurate revenue forecasts.
For example, your business has a current MRR of $20,000 and has seen its MRR grow by 5% monthly over the past year. Using that information, you can forecast your revenue generation based on the current pace. You can also plan for the best and worst-case scenarios by changing your monthly growth rate.
Increase Your MRR With a Subscription Management Solution
Increasing MRR should be a top priority for any subscription business. However, it's vital to understand what actions to take to be successful.
The best way to increase your MRR is with Revolv3's subscription management solution. Our payment optimization platform offers subscription merchants powerful tools to help improve their revenues and lower customer churn rates. Try a demo today to see how Revolv3 can grow your business at the lowest cost in the industry.