How to calculate MRR?
MRR is calculated by taking into account all the active and non-renewing’ subscriptions. Subscriptions in free-trial are not included in the calculation.
There are two ways to calculate MRR:
Sum of all the money received from your paid subscriptions/customers.
MRR = Sum(Monthly Recurring Charge of all paying customers)
If you know your ARPU (Average Revenue Per User), you can then multiply it with the number of paying customers to find your MRR.
MRR = ARPU * Number of paid customers
Why MRR is important for your business?
If your business revolves around subscriptions, this should be a fair representation of the money your customers will be bringing in. It depicts the health of a business, something an investor will look at before he or she invests in the business. That makes MRR the one number metric you should strive to be growing every month.
What are the different components of MRR?
While measuring MRR can be straightforward, the metric can be broken down to help you understand how your business is performing in terms of acquisition, retention, and scaling.
- New MRR: This is the revenue your business makes from all the new customers gained during a month. This can be directly attributed to all your new customer acquisition strategies and help mark out the channels that contribute to revenue.
- 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 gives you a fair representation of how well your product scales with the growth of your customers.
- Expansion MRR: Often confused with Upgrade MRR, Expansion MRR also takes into account 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 are able to convert free customers to paid customers, and how often canceled subscribers return to you.
- Contraction MRR: This metric reports the MRR lost due to cancellations, downgrades to lower price plans, removal of recurring add-ons or even because of availing discounts. It is useful for understanding how well your business is able to retain the MRR from existing subscribers, indirectly indicating the capability of your product/service to scale with your customers’ needs.
- Churn MRR or Cancellation MRR: A component in the calculation of Contraction MRR, Churn MRR or Cancellation MRR takes into account the MRR lost due to canceled or churned subscriptions. Churn is useful in understanding how well your product stays relevant to your customers’ needs. During the early stages of a subscription business, a high or a rising churn MRR or cancellation MRR may indicate poor product-market fit, while a similar trend during later stages may point towards a recent marketing campaign that brought in customers with the wrong promise.
- Downgrade MRR: This is the other component that drives Contraction MRR. Downgrade MRR is the sum total of all reductions in MRR from existing customers, excluding those from cancellations.
- Reactivation MRR: Additional MRR from customers who had previously churned or canceled. Reactivation MRR is a component of expansion MRR. It is important for these customers to have contributed $0 to the MRR in the previous month (does not include users in free trials).