What is Monthly Recurring Revenue(MRR)?
Monthly recurring revenue (MRR) is a measure of the amount of revenue that a company can expect to receive on a monthly basis from its customers.
How to calculate monthly recurring revenue
the most common formula for calculating MRR is multiplying the total number of active (paying) accounts in a given month by average revenue per account or average revenue per user.
The formula for monthly recurring revenue:
Total Number of Active Accounts x Average Revenue Per Account (ARPA) = Monthly Recurring Revenue
Averages are often not a one-size-fits all metric. Be sure to choose which average to use, depending on your business:
- Average Revenue Per Account (ARPA) = Total Recurring Revenue ÷ Total Active Accounts
- Average Revenue Per User (ARPU) = Total Recurring Revenue ÷ Total Active Users
Additionally, you can use this formula across different time frames. You can easily take totals of revenue and users (or accounts) by month, quarter, or year. Effectively, you can establish different recurring revenue KPIs. However, you must state that because MRR is based on averages. It is not truly representational of your company’s bottom line.
If you have varying digital business models, we recommend segmenting your MRR by them. For example, you would have a subscription MRR and a usage-based MRR. The jury is still out if usage-based MRR is truly a good KPI. Finding the average of a usage-based pricing model as opposed to a static pricing model is obviously dubious.
In addition to pricing models and time frames, a few other factors can impact MRR. Such as Churn (the rate at which customers cancel their contracts with your company). And Expansion (the rate at which existing customers increase their existing contracts). Overall, MRR is a valuable metric for businesses to track. Considering it provides insight into the health, stability and growth of their recurring revenue stream. Furthermore, it is frequently used in the venture capital space as a critical metric to use when determining the valuation of a startup.
Examples of products built on Monthly Recurring Revenue
The most prolific and clear example of a company that focused on monthly recurring revenue as a metric is Netflix, founded in 1997. It began as a subscription-based DVD and VHS delivery service. Moreover, they innovated their business model and launched the first mass-market streaming service as a subscription. They had a net income of 5.116 billion USD in 2021. By offering subscriptions, they created a stable and consistent revenue stream. Due to this, a different metric than annual recurring revenue needed to be created to effectively measure business growth.
Some general examples of companies that benefit from using MRR as a growth KPI:
- SaaS companies: Many software-as-a-service companies generate monthly recurring revenues through subscription and often usage-based models. For subscriptions, they charge a flat recurring fee, for access to their software. Monthly recurring revenue is a useful KPI for SaaS companies because revenue change is clearly seen month-over-month.
- Membership sites: If you have a membership site, like a newspaper or magazine, you can generate monthly recurring revenue by charging members a recurring fee for access to your site. It is a classic subscription.
- Recurring orders: Some businesses generate monthly recurring revenue by charging customers for recurring orders. For example, if you sell coffee, you could charge customers a monthly fee for their coffee subscription. With the increased usage of data, businesses that provide recurring orders are adjusting to create new business models on a pay-per-use basis. An espresso machine manufacturer could offer their machines on a pay-per-use basis. Instead of paying for, for example, a subscription or a flat purchase fee. Each cup of coffee would cost a business x amount, rather than a flat subscription fee or bulk upfront cost.
- Service contracts: If you offer service contracts, you can generate monthly recurring revenue by billing customers monthly. Another innovation in this area is education subscriptions. Service contractors (like marketing freelancers) are building educational videos and content into their offerings. Then, selling them as a subscription and creating a self-service solution.
- Equipment as a Service: Innovative device manufacturers are beginning to offer heavy machinery as part of a subscription model. The primary benefit of this is it covers the full lifecycle of a device, from financing, cash flow, and equipment management with a data-driven approach. This improves the longevity of the device, reduces supplier waste, and creates an integrated, affordable customer experience. Read our wiki on equipment as a service (EaaS) or explore examples of physical product subscriptions to learn more.
There are countless examples of digital business models that have achieved success with recurring revenue models and driven MRR. If you’re looking to build a stable and successful business, achieving stable, predictable recurring revenue should be one of your top priorities.
How to Increase your MRR as a SaaS Startup
We have already touched on the two broadly defined ways to generate recurring revenue: through subscriptions and through recurring payments for products or services. You can generate MRR by selling access to content, software, or other digital or physical products as subscriptions.
More recently, innovative companies have challenged these standard MRR streams with things like equipment-as-a-service, usage-based business models, and hybrid business models.
As a software as a service (SaaS) business, there are a number of ways to increase your MRR, and we’ve compiled a list of some of the most effective methods below:
- Offer discounts for prepaying: Many customers are willing to prepay for annual or semi-annual subscriptions in order to receive a discount. This not only provides you with up-front cash flow. But also increases the likelihood that customers will stick with your service long-term.
- Include additional features: Customers are often willing to pay more for additional features that improve the value of your service. When adding new features, be sure to segment your customer base so that you can offer different pricing tiers based on the value each customer receives.
- Increase prices for existing customers: If you’ve been providing quality service at a low price point, it may be time to consider raising prices for existing customers. Of course, you should do this gradually and only after ensuring that the increased prices are still competitive relative to other options in the market.
- Prepare free trials of your product or service: This allows potential customers to try out the product or service before they commit to paying for it.
- Create referral programs: Referrals are a great way to acquire new customers and upsell existing ones. Referral programs give existing customers a discount or incentive for referring new customers to the company.
- Use a dedicated billing and monetization platform for billing automation and subscription management. Often, businesses miss opportunities for new monthly recurring revenue by being stuck in suboptimal financial systems and software. With cutting-edge software built for digital business models, you can easily configure new subscriptions, usage-based business models, and more, in any market.
By implementing one or more of these strategies, you can quickly start generating more monthly recurring revenue and growing your business at a sustainable pace.