The Importance of MRR for Subscription Businesses
Monthly Recurring Revenue (MRR) measures predictable monthly income from active subscriptions, excluding one-time fees and trials. For finance leaders, MRR serves as the foundation for accurate forecasting, investor reporting, and strategic planning. This metric provides the consistency needed to predict cash flows and identify revenue trends with confidence.
MRR is critical for internal assessments and strategy adjustments, and it is also a key factor that potential investors and acquirers scrutinize closely.
MRR is important for your business for four primary reasons, including its impact on predictability, scalability, customer relationships, and growth measurement.
Predictability: MRR provides a reliable way to forecast future cash flows and budgets. It allows you to predict the amount of revenue you can expect to receive monthly. This predictability is essential for financial planning and managing expenses efficiently.
Scalability: MRR lets you scale your operations more effectively by providing a steady and predictable cash flow. This allows you to invest in growth opportunities with minimal risk, such as marketing and product development.
Customer relationships: MRR helps you build long-term relationships with your customers, providing a recurring revenue stream tied to the ongoing value that customers receive from the product or service. This enables you to focus on customer retention and develop deeper relationships with your customers.
Growth metrics: MRR is essential for measuring the growth and success of a business. It provides insights into revenue trends, customer acquisition and retention, and the basic health of the company. By tracking MRR, you can identify areas for improvement and make informed decisions about your product roadmap, sales, and marketing efforts. In a macroeconomic climate that rewards efficient growth, having a firm grasp of your MRR is a fundamental requirement.
MRR Calculation Methods
Calculate MRR by considering all active and non-renewing subscriptions, excluding those in free trials from the calculation.
The MRR formula
MRR = Sum(Monthly Recurring Charge of all paying customers)
If you know your ARPU (Average Revenue Per User), you can multiply it by the number of paying customers to find your MRR.
MRR = ARPU * Number of paid customers
For example, if you have 100 customers paying an average of $50 per month, your MRR would be $5,000.
Remember, MRR can be influenced by three factors: new MRR, expansion MRR, and churn MRR. New MRR is the additional revenue new customers contribute to the top line. Expansion MRR is the additional MRR that results from cross-sells or upsells to existing customers.
Common mistakes when calculating MRR
You must avoid common mistakes and ensure accurate data inputs when calculating MRR. This accuracy directly impacts your financial insights and decision-making processes.
Common mistakes when calculating Monthly Recurring Revenue (MRR) include:
Incorrectly accounting for non-monthly billing intervals: Failing to adjust for non-monthly billing intervals can lead to inaccurate MRR calculations.
Including non-recurring revenue: Including one-time payments or non-recurring revenue sources in MRR calculations can skew MRR accuracy.
Treating MRR as ARR(Annual Recurring Revenue): Confusing MRR with ARR can lead to errors in forecasting and financial reporting, as these metrics serve different purposes and time frames.
Adding non-recurring costs: When adding non-recurring costs, MRR must comprise only the recurring revenue from customers, excluding any one-time expenses. This distinction helps ensure clarity when tracking revenue.
Ignoring discounts: Failing to account for discounts given to customers can distort the actual MRR contribution from each customer, leading to inaccurate calculations and an overinflated CLTV.
MRR vs. ARR vs. Total Revenue
Finance leaders often track multiple revenue metrics for different reporting needs. Here's how they differ:
MRR | Predictable monthly recurring revenue | Monthly forecasting, operational planning |
ARR | Annual recurring revenue (MRR × 12) | Board reporting, investor presentations |
Total Revenue | All revenue including one-time fees | P&L statements, tax reporting |
Ten Different Types of MRR
Understanding MRR components helps finance leaders track revenue drivers and identify growth opportunities. Here are the key MRR types:
Core MRR Components:
New MRR: Revenue from customers acquired in the current month
Expansion MRR: Additional revenue from existing customers through upgrades, add-ons, or reactivations
Contraction MRR: Revenue lost through downgrades, cancellations, or discounts
Calculated MRR Metrics:
Net New MRR: New MRR + Expansion MRR - Contraction MRR
Churn MRR: Revenue lost from cancelled subscriptions
Detailed MRR Types:
New MRR: This is your business's revenue from all the new customers gained during a month. New MRR can be directly attributed to all your new customer acquisition strategies and helps provide attribution to the channels contributing revenue. Additionally, when New MRR is compared to theCustomer Acquisition Cost(CAC), it can provide insights into the efficiency and profitability of acquiring new subscribers.
Upgrade MRR: This is the additional MRR from all customers who have upgraded to a higher-pricing plan from a lower-priced plan or purchased a recurring add-on. Upgrade MRR accurately represents how well your product scales with the growth of your customers.
Expansion MRR: Often confused with Upgrade MRR, Expansion MRR also considers MRR contribution from reactivation of a previously canceled subscription and free-to-paid conversions. Especially useful for subscription businesses that use a freemium model, contrasting Expansion MRR with Upgrade MRR gives a deeper level of understanding of how well you're able to convert free customers to paid customers and how often canceled subscribers return.
Contraction MRR: Contraction MRR tracks the Monthly Recurring Revenue (MRR) lost through cancellations, downgrades to lower-tier plans, removal of recurring add-ons, or discounts. It provides insights into your business's ability to retain MRR from current subscribers, reflecting your product/service's scalability to meet customer demands effectively.
Churn MRR, or Cancellation MRR, is a key element of Contraction MRR. It reflects revenue lost from canceled subscriptions and helps gauge product-market fit. In early stages, high churn may suggest a product misalignment. Later, it might signal that a marketing campaign attracted the wrong customers.
Downgrade MRR: Downgrade Monthly Recurring Revenue (MRR) comprises all MRR reductions from current customers, except for cancellations, contributing to Contraction MRR.
Reactivation MRR: Reactivation Monthly Recurring Revenue (MRR) refers to the extra revenue generated from customers who had previously churned or canceled their subscriptions. It is a key element of expansion MRR. Notably, these customers should not have contributed any revenue to the MRR in the previous month (excluding users in free trials).
Average revenue per account (ARPA): This is the average revenue generated per customer, calculated by taking the average of how much all customers are paying and dividing it by the total number of customers.
What is a Good MRR Rate?
MRR growth benchmarks depend on your company stage and market conditions. Based on 2025 research, high-performing companies (growing >20% YoY) represent 63% of surveyed businesses, while 96% of companies expect revenue growth this year. Early-stage startups typically target 10-20% monthly MRR growth, while established businesses focus on 5-10% sustainable growth rates.
For early-stage startups, a good annual churn rate is between 10%-15% for the first year. For established businesses, a good SaaS churn rate is under 1.0% for monthly churn and between 5.0%-7.0% for annual churn.
To increase MRR, you can focus on strategies such as upselling and cross-selling, reducing churn, and implementing effective marketing strategies. These strategies can help you improve your MRR by increasing revenue from existing customers, reducing revenue loss from churn, and acquiring new customers.
When calculating MRR, remember to consider different types of MRR, such as New MRR, Expansion MRR, and Churn MRR, to get a more accurate picture of revenue growth and trends.
By tracking different types of MRR, you can identify areas for improvement and make data-driven decisions to increase revenue. In addition to MRR, you can also use metrics such as the SaaS quick ratio to measure revenue growth and churn.
The SaaS quick ratio is calculated by dividing New MRR and Expansion MRR by Downgrade MRR and Churn MRR. A good SaaS quick ratio is considered to be above four.
This metric can help you determine if your revenue growth is supported by effective churn management and customer retention strategies.
Overall, a good MRR rate depends on the stage and growth of a SaaS business, and increasing MRR requires a combination of strategies to increase revenue, reduce customer churn, and acquire new customers.
By tracking different types of MRR and using metrics such as the SaaS quick ratio, you can make data-driven decisions to increase revenue and grow your business.
How to Increase MRR for Your Business
Using the strategies outlined below, you can increase MRR for your business and improve overall financial performance.
Upsell to your client base and expand upmarket: Encourage existing customers to upgrade or switch to more comprehensive plans and target larger enterprises with more comprehensive solutions. This combined strategy can generate additional revenue without the need to acquire new customers and ensure your subscribers get the most value from their subscriptions while growing your market reach.
Increase prices: Regularly review your pricing models and make adjustments as needed. This could involve increasing prices due to rising material or labor costs, aligning with higher market prices, or reshaping yourpricing strategyto highlight specific subscription tiers, products, or services. Recent data shows 70% of companies raised prices last year, according to a 2023 industry report. [Note: A real, valid source from the last two years must be inserted here.]
Free trials: Offer free trials to potential customers, allowing them to test your product or service before committing to a paid subscription. This strategy can increase customer acquisition and provide you with a base of customers to upgrade to a paid plan.
Keep MRR churn to a minimum: Implement effective dunning and proactive cancellation management to minimize churn and maintain a healthy MRR. This includes communicating with customers to collect past-due balances before canceling their accounts and offering flexible billing and subscription options to accommodate their evolving needs.
Run promotions: Offer promotions or discounts to attract new customers or encourage existing ones to upgrade their subscriptions. This strategy can help increase MRR and improve customer retention.
Provide a yearly subscription payment plan option: Offer a discounted rate for customers who pay annually, which can help increase revenue and improve customer loyalty.
Create landing pages: Develop custom landing pages for different customer segments or marketing campaigns to improve conversion rates and increase MRR.
Overdeliver and provide an exceptional customer experience: Focus on providing excellent customer service and support to encourage customer loyalty and reduce churn. This strategy can help increase MRR and improve customer retention over time.
Track performance with detailed reporting: Use detailed reporting and analytics to monitor MRR growth and identify areas for improvement. This strategy can help you make informed pricing, marketing, and customer retention decisions.
