Recurring Revenue is to SaaS subscription businesses what flowers are to a fruiting plant- it’s the whole point, keeps the business going, and if it’s missing or has an issue, growth stalls. With subscriptions, customers pay a set amount each month and the company can then calculate the cash flow that is expected to come in each month to determine its health.
Though it is not a Generally Accepted Accounting Principle (GAAP), MRR is one of the most important SaaS metrics benchmarks that a business can track in order to know how well the company is doing currently and how well it will do long term.
What is MRR?
Monthly Recurring Revenue (MRR) is the predictable revenue that is expected to be received on a monthly basis. It is what makes SaaS companies attractive in business because rather than receiving revenue one time for one purchase, the service is paid for regularly each month. Because of this, MRR growth is predictable and consistent and allows for accurate projections to be made.
How to Calculate MRR
The simplest way to calculate MRR is to multiply the Average Revenue per account by the total number of users in a given month.
For example: If you have 100 customers paying $10 per month, your MRR = $1,000
This number is the simplest to calculate but can then also be broken down into other important metrics that help to give an accurate picture of where your growth or loss is coming from.
Types of MRR
- New- Revenue gained from acquiring new customers
- Expansion- Revenue gained from existing customers in the form of upgrades
- Contraction- Revenue lost from downgrades
- Customer Churn- Revenue lost from cancellations
Why MRR is Important
Tracking all types of MRR helps to understand how your company is growing, how to better invest advertising dollars, and where changes should be made. It is commonly known that it costs less to keep and upsell current customers than to find new customers, therefore tracking the MRR churned on a monthly basis helps to know where your service is going wrong or how you are thriving with your net retention rate.
Knowing these exact metrics also helps to predict your annual recurring revenue to make plans for the future of the company.
Unfortunately, many small business SaaS companies make a few mistakes when beginning to calculate MRR and this is important to avoid. If not careful, you could be reporting incorrect numbers to your board or investors and also working with incorrect data for predictions and future calculations.
A few common mistakes in calculating MRR are:
Including Trial Members
You should not include anyone into MRR until they are a full paying customer. Including predicted revenue into your monthly revenue will give you an inflated sense new customers and also will contribute to high churn rates because it is not realistic that 100% of those on a trial will convert.
Not Accounting for Discounts
It is important to keep close tabs on the members who are using your product at a discounted rate. Calculating these members in a separate category helps to ensure that you are not accounting for money you don’t currently receive. Your MRR will be seriously skewed if you count members who receive a 50% discount as paying full price.
Calculating Annual Subscriptions Incorrectly
If you have customers that subscribe to annual memberships, it is important to divide their payment by the intended number of months that they are subscribing. Calculating a large payment all at once, in one month will affect all of your projections and will not give you an accurate picture of how your recurring revenue is growing each month.
Securing Capital for Your SaaS Growth
Having accurate calculations for your Monthly Recurring Revenue is absolutely essential because it gives you a clear picture of how quickly your company is growing and allows for you to prepare to take your business to the next level.
At RevTek Capital, we provide revenue-based financing. Meaning, payments are based on your MRR. We understand that monthly revenue can fluctuate, therefore knowing how much MRR you bring in each month helps you to secure an accurate amount of growth capital funding and ensures that you only repay us amounts that are affordable for your business each month.
Our team is not only experienced in capital funding but also in understanding SaaS Recurring Revenue. We can connect you with partnerships to help you track metrics and growth and also help you to secure the funding you need. Contact us today if you have more questions or are ready to begin a partnership with RevTek Capital.