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Sales - 10 min READ

What's monthly recurring revenue (MRR)?

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Author photo: Jess Day

Jess Day

Monthly recurring revenue (or “MRR” for short) is one of—if not the most—useful metric sales managers can measure.

This is especially true for SaaS companies or any organization that uses subscription-based models to generate their income and earn revenue growth.

MRR lets you know how much money you’re bringing in every month in an existing account, meaning you always know exactly how your business is doing.

If you aren’t calculating and keeping track of your MRR on a regular basis, it’s time to start.

In this article, we’ll cover the following questions about MRR:

Let’s get started.

What is monthly recurring revenue, anyway?

Your MRR is the amount of money your business makes from recurring revenue streams (like subscriptions) on a monthly basis.

Trying to figure out how much money you're making every month , and coming up with a recurring revenue model, can get confusing fast—especially if you have multiple price plans and billing periods that vary from customer to customer. It’s much easier to see how you’re doing when you only need to look at one metric.

Your MRR is that one metric; it gives you a clear view of how your business's financials are doing in any given month by averaging out your recurring revenue sources into a single number.

A quick Google search will tell you the basic formula to calculate your MRR:

mrr calculation
The basic MRR calculation looks pretty straightforward... subscription customers x $ they pay you / month...

Done! Wait…

A simple, easy formula to use for a recurring revenue model is cool and all (there's more to this calculation and we’ll go over how to calculate MRR in detail later in this article), but you need to know how to apply the data you get from it. (Don’t worry, we’ll go over that as well.)

Why does MRR matter?

Okay, we went over one reason you should be keeping track of your MRR: so you know how much money you’re making every month.

But there are other reasons too.

Knowing how much money you’re making on a regular basis allows you to:

  • Forecast more accurately. Because you’ll have consistent data to back up your predictions, you’ll be able to create reliable sales forecasts for future revenue.
  • Budget more effectively. Having an accurate understanding of how much money you have coming in every month lets you better plan how much money you can afford to spend.
  • Track your revenue growth over time. MRR is the easiest, fastest way to see if your subscription sales numbers are going up or down every month.

In other words, MRR is life.

Knowing how much money you’re making is tied to a bunch of other critical business factors—like whether you’re growing or staying the same (or *gulp* going downhill).

Don’t leave your company’s success up to guesswork or “predictable revenue.”

How to calculate MRR:

There are actually two ways to calculate your MMR. One works better for small businesses, and one works better for larger corporations.

For both monthly revenue methods, you’re going to want to account for all of the following revenue factors:

DO consider: all subscription instances for total MMR.

  • New subscription values (new customers)
  • Reactivated subscription values (previous customers who canceled but came back)
  • Expanded subscription values (existing customers who upgraded their plan)
  • Contracted subscription values (existing customers who downgraded their plan)
  • Churned subscription values (lost customers)

(Add up the first three and then subtract the last two to get your true, accurate MRR.)

DO NOT count: one-off charges.

  • Revenue generated from one-time charges (like they just paid add-on fees for five additional users)
  • Trial users (if they forgot to cancel their free trial and got charged, don’t count that)
  • Set-up fees (if you charge money for initial product set-up for new users)
  • Credit adjustments (for accidental missed, mischarged, or returned payments)
mrr calculation breakdown

Method 1: Just add it all up (good for small companies).

How to do it: Literally, just add up the value of all your paid subscriptions.

Example: If you have a total of three customers and one pays $10/month, one pays $20/month, and one pays $30/month, your MRR would be $60.

Pros: Simple, accurate to a T

Cons: Can be tedious if you’re a larger company with hundreds of thousands of customers, which brings us to our second method…

Method 2: Average it out / “ARPU” (good for big companies).

How to do it: Multiply the number of customers you have by the average of their monthly subscription payment amounts (a.k.a. "ARPU," which stands for Average Monthly Recurring Revenue Per User).

Example: If you have 1,000 customers paying an average of $50/month, your MRR would be $50,000.

Pros: Much more efficient way to calculate MRR for customers with large customer bases

Cons: Not as exact as the first method, but this is a non-issue with large companies since there is less chance for the data to be skewed

Pro-tip: If you want to find your Annual Recurring Revenue (ARR), just calculate your MRR by 12.

Don’t worry, you don’t have to calculate MRR manually.

If you don’t already have a solution place to calculate your MRR, we’ve got you covered. There are tons of different tools out there built to calculate and track MRR, making choosing one a hard decision.

This will help. According to Pabbly, here are your five best options:

best mrr tracking tools

How do you grow MRR?

Okay, so now you know what your MRR is. As a sales manager, what comes to mind next is probably: “how do I increase this number for MRR growth?”

To increase your MRR, you need to generate more revenue every month (shocker).

Here are some ways to do it:

  1. Get your freemium customers onto paid plans.
  2. Upgrade your existing paid customers.
  3. Focus on lead quality, not quantity.
  4. Raise your prices.
  5. Lower your prices. (Wait what? Yes.)

1. Get your freemium customers onto paid plans.

A lot of SaaS companies offer a free (“freemium”) plan to users.

Take a look at your freemium customers and see if any of them are a good fit for your paid plan instead.

slack's pricing plans

Slack offers an unlimited, free plan for small teams to strengthen total MRR. Some of these freemium customers may eventually move on to the Standard plan as their team grows.

2. Upgrade your existing paid customers.

Have any of your existing paid customers experienced explosive growth that qualifies them for one of your higher-end subscription plans? Make sure your pricing model matches the amount of value they’re getting out of your product or service.

(Plus, it’s always cheaper to sell to your existing customers when increasing MRR growth rate, than to acquire new ones.)

One way to do this is to add prompts to your lower-tier user interfaces, encouraging users to upgrade.

For example, Asana sprinkles prompts to upgrade throughout their user interface. When a user tries to use a premium feature, a prompt appears with the option to purchase it. This is an excellent tactic because you don’t even need to explain the value of the upgrade to the user—they’ve already discovered it.

asana's upgrade strategy

You can find some more great examples here.

3. Focus on lead quality, not quantity.

Are you attracting the right types of customers in the first place for existing accounts?

According to a study by Marketing Sherpa, the average lead conversion rate (a.k.a. the number of your leads that turn into paying customers) for SaaS companies is 7%.

If you’re not hitting this MRR growth rate mark, you might be casting too wide a net when fishing for leads and new customers. Instead, define your target audience and ideal customer profile. Then work with Marketing to ensure your product’s messaging is well-positioned to reach this audience specifically.

Image for post Need more leads?
Pro-tip

Need more leads?

Learn how sales reps can prospect more effectively in this webinar with PersistIQ's CEO.

4. Raise your prices.

Ask yourself this: are you really charging enough to gain MRR growth? Or are you not giving your product enough credit?

Think about it. Your product solves problems. Whether it’s saving customers time or money, or helping them make more money, you’re doing your customers a solid in terms of the value your product is providing, even with an increased monthly fee.

So, don’t cut yourself short when it comes to pricing that value for loyal and new customers.

Keep in mind though, increasing subscription prices could contribute to churn… so you’ll need to either up the value customers are getting or be otherwise prepared to justify the increase, besides additional MRR.

Image for post Destroy churn.
Pro-tip

Destroy churn.

Learn strategies to reduce churn and keep customers longer with this handbook.

Here are some examples of well-known companies that recently raised their prices, and how they justified the increase:

Netflix:

At the beginning of this year, Netflix hiked their prices up 13-18% (depending on the subscription plan). The value they added to their service to justify this price increase includes releasing new, original video content (dubbed “Netflix originals”) and expanding their library to include hits like Friends and the Harry Potter franchise.

Amazon:

Last year, e-commerce giant Amazon increase their annual Prime membership plan from $99 to $119 in the US. The additional value they added to the plan includes a new delivery service called “Prime Now,” which delivers groceries and other essential items to members in just two hours. They’ve also invested billions on putting together their own library of TV shows and movies, which their members can stream at no additional cost.

5. Lower your prices.

Hold on, don’t skip over this one just yet.

We get it, we just suggested raising your prices because you're not charging enough for your monthly fee. Well sometimes, you're charging too much to help monthly revenue.

Or, your price is fair, but it comes off as intimidating for a lot of people, in which case you might want to consider offering a more affordable, broken-up subscription option.

For example, Adobe’s creative programs like Photoshop and Lightroom weren’t always available on a subscription basis. Photoshop alone used to cost a whopping $699, making it accessible only to schools, offices, and very serious hobbyists, really. So, Adobe launched their Creative Cloud subscription. With their cheapest plan priced at just $9.99/month and including Photoshop, Lightroom, and 20GB of cloud storage, even the most casual of hobbyists can afford their product.

Not only did this allow Adobe to reach a wider customer base and get additional MRR, but each of these customers have the potential for a customer lifetime value (CLTV) exceeding the $699 price point. Well played, Adobe.

adobe's updated subscription model
Adobe’s range of subscription options and price points allow them to reach a multitude of audiences.

Hint: It helps if you know how much of your MRR is coming from where.

It can be hard to know where to start when it comes to growing your MRR. Sure, there are lots of ideas out there (like the seven we just mentioned above) but not all of them will work for your unique business. Some will also work better than others.

Here’s an idea for how to zero in on a monthly recurring revenue strategy: start by figuring out how much of your revenue is coming from each of your subscription plans.

For example, let’s say you have three subscription models:

subscription models examples

This data in this example reveals that your mid-level subscription model is generating the most money for your business every month.

Based on this example, you might choose to shift your sales focus to upgrading your existing paid customers—particularly, your Basic-plan subscribers to the Mid-level plan.

You might also choose to increase your Basic subscription price by a few dollars, based on the fact that its number of active subscriptions are significantly higher than your other two models.

For example, if you increased the price from $19.99 to $22.99, your MRR for that model would increase from $1,999 to $2,229—that’s a big difference.

You could also link up with the marketing manager and show them your findings so they can plan a new marketing campaign or refine existing messaging to target mid-level clients specifically.

Key takeaway: Knowing where your money is coming from will help you make better business decisions.

MRR is more than just a number.

Knowing what your MRR is one thing—but using that data to gain insight into your business and influence future decisions on is what’ll make the biggest difference to your sales numbers.

Go forth and use these strategies to boost yours!

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