Monthly Recurring Revenue

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21 Aug, 2024

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Monthly Recurring Revenue (MRR) Meaning

Monthly Recurring Revenue (MRR) refers to the recurring stable income that firms are subject to receive on a monthly basis without interruption. It holds immense significance within subscription-based enterprises, particularly software-as-a-service (SaaS) companies. It represents the predictable and stable revenue generated from subscription customers every month.

It considers recurring charges from various sources like discounts, coupons, and recurring add-ons that are part of the subscription. MRR assists organizations in comprehending their consistent revenue flow, empowering them to make well-informed choices regarding resource distribution, budgeting, and growth strategies.

Monthly Recurring Revenue (MRR) Meaning

Monthly Recurring Revenue (MRR) refers to the predictable and consistent revenue generated by a subscription-based business from its customers every month.
MRR models provide opportunities for upselling additional features or services, driving higher revenue from existing customers.
MRR focuses on monthly revenue generated from subscriptions, providing a short-term perspective. At the same time, ARR calculates the projected annual income, offering a more extended view of a company's financial performance and sustainability.

Monthly Recurring Revenue Explained

Monthly Recurring Revenue (MRR) is a crucial metric used by subscription-based business model, particularly in the SaaS (Software-as-a-Service) industry, to gauge their financial performance and growth. MRR represents the total predictable and recurring revenue that a company expects to receive from its subscribers every month. There are different types of MRR mentioned below -

New MRR (NMRR): It refers to the monthly revenue generated from new customers who have recently subscribed to a product or service. It includes the subscription fees, add-ons, upgrades, and other recurring charges for these new customers. NMRR indicates the ability to attract and convert new customers.
Expansion MRR (EMRR): It denotes the supplementary income from current customers who have enhanced their subscription plans, incorporated new functionalities, or procured additional add-ons. It reflects success in upselling and cross-selling to an existing customer base.
Churned MRR (CMRR): It is the revenue lost due to customers who have canceled or downgraded their subscriptions during a specific period. It reflects the negative impact of customer attrition on recurring revenue streams.
Contraction MRR (Contraction): It is the reduction in revenue resulting from existing customers downgrading their subscription plans or removing features. Like churn, contraction impacts overall MRR by decreasing the recurring revenue you receive.
Net New MRR (NNMRR): It is the sum of New MRR and Expansion MRR minus the Churned MRR and Contraction MRR. It provides a comprehensive view of MRR growth, accounting for new and existing customers and customer attrition.
Total MRR (TMRR): It represents the cumulative monthly revenue from active customers, encompassing subscriptions, add-ons, and upgrades, irrespective of customer status.

How To Calculate?

Average Revenue Per Account (ARPA) and Average Revenue Per User (ARPU) are widely used metrics for calculating MRR in subscription-based businesses.

Both ARPA and ARPU represent the average amount a customer is billed. The formula for both metrics involves dividing the total recurring revenue by the total number of accounts (for ARPA) or users (for ARPU).

Average Revenue Per Account (ARPA) = Total Recurring Revenue ÷ Total Active Accounts

Average Revenue Per User (ARPU) = Total Recurring Revenue ÷ Total Active Users

Ensuring that only recurring revenue is considered, excluding one-time fees, is crucial. Only active paying accounts or users should be included, excluding those on free trials.

Here is the Monthly Recurring Revenue formula:

Monthly Recurring Revenue (MRR) = Total Number of Active Accounts x Average Revenue Per Account (ARPA)

Monthly Recurring Revenue (MRR) = Total Number of Active Users x Average Revenue Per User (ARPU)

Examples

Let us look at the MRR examples to understand the concept better.

Example #1

Assume John runs a subscription-based software service with three subscription plans: Basic, Standard, and Premium. Here's some information for the current month:

Basic Plan: 300 subscribers, $20/month
Standard Plan: 200 subscribers, $40/month
Premium Plan: 100 subscribers, $80/month

John wants to calculate ARPA and then use it to calculate MRR.

Calculate ARPA:

Total Recurring Revenue = (300 * $20) + (200 * $40) + (100 * $80) = $6,000 + $8,000 + $8,000 = $22,000
Total Active Accounts = 300 + 200 + 100 = 600
ARPA = Total Recurring Revenue ÷ Total Active Accounts = $22,000 ÷ 600 = $36.67 (approximately)

Now that we have ARPA, let's proceed to calculate MRR.

Calculate MRR using ARPA:

Total Number of Active Accounts = 600
MRR = Total Number of Active Accounts x ARPA
MRR = 600 * $36.67 = $22,002 (approximately)

So, in this hypothetical scenario, the Net Monthly Recurring Revenue is approximately $22,002 based on the calculated ARPA of $36.67.

This example illustrates how John can use ARPA to determine the expected recurring revenue for the month and then calculate MRR by multiplying ARPA by the total number of active accounts. These metrics provide insights into a business's revenue performance and help him make informed decisions for growth and strategy.

Example #2

Imagine a software company called TechSolutions offering a cloud storage service. With 1,000 users on their Basic Plan at $5/month and 500 users on their Premium Plan at $10/month, TechSolutions' MRR would be the combined total of these subscription fees, highlighting their consistent monthly income. As users upgrade or downgrade plans and new customers sign up, the MRR reflects these changes, helping TechSolutions track their financial stability and make informed decisions about resource allocation and customer retention strategies.

Example #3

High Wire Networks, Inc., a prominent player in managed cybersecurity and technology enablement, has achieved a remarkable milestone, with its MRR exceeding $1 million. This accomplishment underscores the company's consistent revenue stream from its managed cybersecurity services and technology solutions.

With a strong focus on growth, High Wire Networks anticipates a revenue surge of 59%-74%, aiming to reach an impressive $43 million-$47 million for the year. This achievement highlights the substantial impact of MRR on the company's financial stability and growth trajectory in the ever-evolving cybersecurity landscape.

Benefits

MRR offers several benefits for subscription-based businesses:

Predictable income: MRR provides a steady and predictable revenue stream, making forecasting and planning for future financial needs easier.
Financial stability: The consistent flow of revenue from MRR helps businesses maintain financial stability, even during periods of uncertainty or economic downturns.
Better planning: With a clear understanding of expected income, businesses can make informed decisions about budgeting, resource allocation, and growth strategies.
Investor confidence: MRR demonstrates a reliable and sustainable business model, increasing investor confidence and potentially attracting funding or partnerships.
Customer-Centric approach: Subscription models encourage companies to focus on delivering value to customers continuously to ensure they stay subscribed, fostering a customer-centric mindset.
Scalability: As customer numbers grow, MRR allows businesses to scale more efficiently, as the increase in subscribers directly correlates with an increase in revenue.

Monthly Recurring Revenue vs Annual Recurring Revenue

The difference between monthly recurring revenue and annual recurring revenue is as follows.

Basis	Monthly recurring revenue (MRR)	Annual recurring revenue (ARR)
Definition	MRR is a metric that calculates the predictable and consistent revenue a business generates every month from its subscription customers	ARR represents a business's projected annual revenue from its subscription customers.
Duration	It considers the subscription fees, add-ons, upgrades, and recurring charges for that specific month.	It calculates the sum of the monthly subscription fees, add-ons, upgrades, and recurring charges for an entire year.

Frequently Asked Questions (FAQs)

What is the difference between MMR and MRR?

MRR stands for Monthly Recurring Revenue, representing the consistent monthly revenue generated from subscription customers. On the other hand, MMR is not a standard industry term and may refer to something unrelated to income or subscriptions. It's essential to clarify the context or intended meaning when encountering the term "MMR."

What is Annual Committed Monthly Revenue (ACMR)?

Annual Committed Monthly Revenue (ACMR) is the annualized version of MRR. It represents the total predictable and recurring revenue that a business expects to receive from its subscription customers over a year based on their committed monthly payments.

Can MRR be negative?

Yes, MRR can be negative in certain situations. When customers downgrade or cancel their subscriptions, it reduces recurring revenue, leading to negative MRR. This scenario occurs when the lost revenue from downgrades or cancellations outweighs the revenue gained from new subscriptions or upgrades.