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What Is MRR and How to Calculate It?
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For most companies in the SaaS sector, the MRR (Monthly Recurrent Revenue) is the most important sales metric of the company.
It works very well as a single KPI or as a sort of shepherd's star that points the way: if this metric is fine, then the whole business is fine. If the metric follows a bad trend or if it collapses completely, business is unlikely to go well.
For other business models where recurrence is important, with a subscription system or other, the MRR is an important measure.
This is precisely the reason why it is so surprising that, according to an analysis made by ProfitWell, many companies miscalculate it.
We'll tell you everything about the MRR in this article so that you don't make the same mistakes.
What is the MRR?
MRR uses the initials of the expression Monthly Recurrent Revenue.
In short, it is a measure that tells us the sum of the recurring turnover made in a month. This is a very useful result to estimate how much the company will generate recurring turnover in the coming months.
For any business model with a strong recurring component, the MRR is certainly the best measurement tool for monitoring sales.
What are the advantages of calculating and monitoring the MRR?
The calculation and monitoring of the MRR will bring you 3 major advantages.
- Forecasts
- Evening Star
- Measure growth
Predict the future health of the company.
MRR is one of the best measurement tools for making precise and realistic estimates of future income.
It allows you to calibrate your marketing expenses, your future cash flow needs, and any other aspect having a financial impact for which you need forecasts.
You can use the MRR as a shepherd's star.
As described at the beginning, for subscription-based business models or any other business models with a strong recurrence component, the MRR is a unique and great measure.
If you calculate it correctly and use it correctly, you can benefit from it to guide you and define whether the decisions you make are correct or not.
Measure your business growth.
Whether you have an investor who trusts you (or intend to find one) or has substantial marketing budgets, the MRR is one of the most important KPIs for assessing the situation in which the company finds itself. Then you’ll find out if you need to put more fuel in your growth engine or, on the contrary, ease off a bit.
If MRR is an attractive measure for your business, there is one thing even worse than not calculating it, it is calculating it incorrectly.
At best, if the error is not too large, you will have a slightly deviated view and your vision of the company will not be very clear.
In the worst-case scenario, you will make the wrong decisions based on the wrong data and unintentionally mislead investors and partners.
Neither of these two scenarios is very positive. Fortunately, measuring MRR is very easy, but you also have to learn to interpret it well.
How do you measure the MRR?
La formule la plus courante pour le MRR est la suivante :
If you use this measure extensively, there is another secondary measure that may interest you: the net change in MRR.
Your formula would be as follows:
- New MRR: MRR on new customers during the given month
- Extension of the MRR: Extension of the MRR on existing customers during the period (for example, sale of a higher subscription or other)
- L MRR lost: loss of MRR due to cancellation or switch to a lower subscription formula with existing customers.
The advantage of knowing these secondary parameters is that they give you a more global view of the health of the company and your MRR.
What are the main errors in calculating the MRR?
To include non-monthly payments in the calculation (such as annual payments).
The idea of the MRR is to take a snapshot of the moment to understand how the business is doing, make forecasts and all the cool stuff that we have already described in the article.
This is why you only want to include in your calculation the monthly payments that you receive.
Include prospects in the calculation.
Even if you have a value assigned to your prospects (amount of opportunity, weighted by the estimated conversion rate), including them in the measure of the MRR would be a mistake.
It skews the metrics and only makes the forecasts based on them more inaccurate.
Disregard discounts granted.
Often to attract customers, you give discounts for the first few months of trial or similar benefits.
Even if these discounts are temporary and will disappear, it is important to make an adjusted calculation of the MRR and therefore to take them into account
To conclude.
To continue improving your business management and moving in the right direction, you need metrics to guide you, and MRR is one of the most important metrics if your business has a strong recurring component.
To have all the data at hand and to be able to easily perform calculations such as the MRR, it is preferable to have a CRM.
And efficy CRM is the best of all.
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