Behind the question of whether a billing system can help your SaaS business grow is the question of what it means for a SaaS business to grow. This guide tackles both — it creates a model you can use to approach SaaS growth and a 360-degree view of how your billing system fits into it. Read More >
MRR vs CMRR
SaaS start-ups have to rely on different metrics to know their financial performance. As you work and develop your product, it is important to use different metrics to know what’s working and what’s not. One of the important metrics you should consider is the CMRR (Contracted Monthly Recurring Revenue or Committed Monthly Recurring Revenue). In this article, we look more into CMRR and how it compares to MRR (Monthly Recurring Revenue), the metric that we discussed in my earlier post.
Undoubtedly, your SaaS company is looking to change the way your target market works. Your tool may be offering consumers incredible value at a relatively lower price. However, to be the giant in the SaaS industry that you are in, you need to watch one metric in particular; the CMRR.
What is CMRR?
In simple terms, CMRR refers to the value of the recurring portion of subscription revenue. There are no fixed rules on what can be included in the CMRR. Therefore, for term-based subscription services, the revenues may or may not include variable fees even if customers are contractually obligated to make the payments.
For monthly subscription business (those without a term agreement), the CMRR is the baseline value of the service. With these business, there are also no rules on calculating the CMRR. Therefore, if your customers do not have to pay any setup or other commitment fee, you can use the history of their payments as your CMRR.
CMRR gives a better picture of the health of a SaaS business than MRR.
Bookings vs. MRR
In the traditional software vendor business, CEO’s are used to calculating revenues based on “bookings”. However, in the SaaS business industry, using bookings to calculate revenues is flawed. Let’s look at an example:
- Customer A signs a one year contract of $5,000
- Customer B sign signs for a three year deal of $2,500 per year
By following the traditional booking revenue recording method, it will seem that customer B has brought more revenue to the SaaS company because he or she generates $7,500 while customer A generates $5,000. However, any good SaaS manager would know that customer A provides the most value since he brings the company $15,000 in three years.
To achieve a better outlook of a SaaS business, you have to forecast revenues using MRR (Monthly Recurring Revenue) rather than bookings.
MRR vs. CMRR – Which One Should You Use to Calculate Revenues?
MRR refers to the total revenue expected from customers every month. Let’s say a SaaS business has 2,000 clients and charges $50 per month , the MRR of the business will be $100,000. The total MRR is arrived at after calculating all the revenues generated per month (be they for different service packages) to the business.
However, the CMRR gives a better picture of the financial standing of a SaaS company than the MRR because it factors the anticipated churn during the period under review. MRR does not consider the expected cancelations, upgrades/downgrades and thus gives a gross overview of the revenues. In case of a high percentage of churn, a SaaS business relying exclusively on MRR to forecast revenues may be in for a rude shock. Companies should use CMRR when forecasting revenues and evaluating their financial standing.
Unlike traditional software vendors whose income statements look backwards and do not differentiate between one time fees and recurring fees, SaaS businesses have to get the Committed Monthly Recurring Revenue metrics right to know the true financial standing of their businesses.
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