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What Is Monthly Recurring Revenue (MRR) and How Can It Help You Understand Business Health?

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Businesses that prioritize MRR can accurately predict future revenue and successfully plan for what’s ahead. [Skyword]

MRR provides deep insight into financial performance, growth potential, churn, and customer value.

One of the most critical metrics for subscription-based and managed services businesses is monthly recurring revenue (MRR). It tells you if your business is growing or shrinking. When managed, appropriately and consistently, MRR will educate and drive some of your most strategic decisions.

In my experience, businesses that prioritize MRR are more agile and less fragile. They can accurately predict future revenue and successfully plan for what’s ahead, whether that means expansion, contraction, or holding steady. I’ll walk you through the basics, including how to calculate MRR, so you can explore ways to grow your revenue streams and increase your business agility.

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What is monthly recurring revenue (MRR)?

While revenue is the total income your company earns, monthly recurring revenue (MRR) is predicted total revenue your business generates monthly from active subscriptions. It includes all recurring charges such as subscriptions, service retainers, promos, discounts, and add-ons, but excludes any one-time fees.

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Why is MRR important?

MRR is a fundamental metric for subscription-based businesses because it provides insights into financial performance, growth potential, churn, and customer value. Its importance extends across various aspects of your business operations, including strategic planning and investor relations.

Calculating MRR provides several benefits:

  • Predictability: MRR helps you forecast revenue more accurately since it represents the consistent income you can expect to receive from subscription fees each month.
  • Performance measurement: Looking at MRR over time lets you understand and compare your growth rate. Steady increases indicate positive performance, while declines might signal issues that need attention such as customer churn (subscription or service cancellations).
  • Investor confidence: Investors often look at MRR as a measure of the health and stability of a subscription-based business. A strong growth trend can instill confidence and attract investors.
  • Budgeting and planning: MRR provides a solid foundation for budgeting and resource allocation. It helps you make informed decisions about where to reinvest in the company. Examples include marketing spend, research and development, hiring, or expansion.
  • Customer lifetime value (CLV): MRR feeds into the calculation of CLV, which estimates the total revenue a customer is expected to generate over their lifetime as a subscriber. This metric is crucial for understanding the long-term value of acquiring new customers and setting proper expectations for when customers may churn.

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5 common types of MRR

The following types of MRR are often used together to provide a comprehensive understanding of a subscription-based business’s revenue dynamics, growth, and customer retention efforts. Tracking each type allows you to identify areas of strength and weakness and make informed decisions to optimize your MRR and overall financial performance.

The most common types of monthly recurring revenue are:

  1. New: This represents revenue generated from new customers who have subscribed to the service within a given month. It reflects growth in your customer base.
  2. Expansion: This comes from existing customers who upgrade their subscription plan or add additional features or services, leading to increased revenue per customer.
  3. Contraction: This represents the revenue lost when existing customers downgrade subscription or retainer plans. It reflects the decrease in revenue per customer.
  4. Churn: This is the revenue lost in a month due to customers canceling their subscriptions. Customer churn indicates the rate at which customers are leaving the service.
  5. Reactivation: This comes from customers who had previously churned but then returned and reactivated their subscriptions within a given month.

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How to calculate MRR

The formula for calculating MRR can vary slightly depending on the nature of your business and how you define your revenue streams, but the high-level formula is pretty straightforward and looks like this:

MRR = Number of active accounts x average monthly revenue per account

Here’s a more detailed breakdown of how to calculate MRR:

  1. Identify your recurring revenue offerings — all sources of revenue that repeat monthly — such as subscription fees, add-on fees, monthly service charges, or retainer fees (exclude any taxes).
  2. Count the number of subscribers for each offering.
  3. Multiply the number of subscribers for each offering by the monthly price of that plan.
  4. Sum up the monthly revenue from each to get the total monthly revenue. 

For example, if your business offers two subscription plans:

Plan A: $50 per month with 100 subscribers

Plan B: $100 per month with 50 subscribers

You would calculate the MRR as follows:

MRR = (100 x $50) + (50 x $100) = $5,000 + $5,000 = $10,000

So, the MRR for your business in that month would be $10,000.

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Other calculation formulas and examples

Depending on the complexity of your business model and data, your calculations may look different. Here are some other useful calculation examples and their basic formulas:

  • Net MRR: This accounts for revenue lost because of downgrades or cancellations and revenue gained from upgrades. It’s calculated by considering changes in MRR.
    • Net MRR = MRR at end of month − MRR at start of month
  • Churned MRR: If you want to calculate the MRR lost from customer churn, use this formula:
    • Churned MRR = Number of customers churned × average monthly subscription fee per customer
  • Expansion MRR: Similarly, you can calculate the MRR gained from customer upgrades with this formula:
    • Expansion MRR = Number of customers who upgraded × difference in monthly subscription fees before and after upgrade
  • Total MRR: To get a comprehensive view of your MRR, sum up all the components:
    • Total MRR = New MRR + expansion MRR – churned MRR + reactivation MRR

Remember to update your MRR calculations regularly to reflect changes in your customer base and subscription revenue. While calculating MRR sets the foundation for understanding your business health, the real work is growing it.

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Ways to grow your MRR

With the help of modern sales tools and emerging technology such as AI, you can streamline your sales processes, improve customer relationships, and optimize marketing efforts — ultimately, driving long-term growth and higher MRR. Regardless of industry, here are some best practices to grow your MRR:

Focus on better lead management: Use a trusted CRM to manage leads effectively by capturing, tracking, and nurturing potential customers through the sales pipeline. Implement lead scoring and qualification processes to prioritize high-value leads who are more likely to convert into paying customers, thereby increasing MRR.

Prioritize personalization

Use data management capabilities to segment your customers based on demographics, behavior, purchase history, and other relevant criteria to meet buyers where they are in the buying process. Personalize your marketing campaigns, upselling strategies, and product offerings to specific customer needs, which can contribute to increased brand awareness, customer trust and higher MRR.

Identify cross-selling and upselling opportunities

Finding opportunities to cross-sell and upsell additional products or services to existing customers is a vital part of increasing your MRR. Analyze customer data to understand their preferences; then use targeted marketing campaigns and personalized recommendations to encourage upsells and expansions. When you upsell successfully and can keep a customer at a higher subscription price, and for longer. — getting a customer to upgrade to a “premium” subscription to access more of your content, for example.

Manage, engage, and support customers

Subscription management tools let you oversee billing, renewals, upgrades, and more, all in one place – a 360 degree view of your customer. They can also help you reduce churn and build stronger relationships with your customers by providing a quick, seamless, and supportive customer experience. By continuously monitoring customer satisfaction rates, you can increase loyalty and maximize lifetime value.

Evaluate your pricing

One way to grow your MRR is to increase the price of your product or service. As long as you stay relevant in the market and provide value to your customers with innovation, attrition of current customers can be avoided. Assess the consequences of upping your prices and test out ways to increase them without losing customers or contributing to churn. For example, you might run a limited-time offer for a new product or service to attract subscribers, like a lifetime member price — a set fee that won’t change over the subscription’s lifetime. Once the offer expires, all new subscribers will be subject to any future price changes. This helps you lock in a bulk of lifetime subscriptions while balancing shifts in the market over time. Another option is to include slight increases over time in longer contracts.

Make the most of analytics and reporting

By using dashboards and keeping tabs on your MRR, you can identify patterns and more accurately forecast your business. Reporting and analytics tools give you insight into your sales performance, customer behavior, and other MRR trends. To help your team grow in the long term, regularly analyze key metrics — conversion rates, average deal size, churn rate, and MRR growth — to hone in on areas for improvement and optimize your sales and marketing strategies.

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Track and manage your MRR to drive sustainable revenue growth

Monthly Recurring Revenue is important because it gives you a complete picture of your customers, finances, and growth potential. This key metric enables you to make informed decisions and drive sustainable business growth. Keeping a close eye on your MRR and its components is a crucial step toward thriving in the subscription-based and managed services economy. As this landscape continues to evolve, tracking — and growing — MRR is a strategy businesses must use to improve and innovate their revenue streams.

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