Monthly Recurring Revenue
(MRR)

What is MRR?

It’s the revenue that recurs every month. It’s the retelling of the predictability that the subscription model promises. It’s a forward-motion metric.

MRR is recurring revenue, normalized, over a period of a month, lets you project, plan, and, most importantly, get a sense of growth’s current stance.

If you’re keen on estimating your annual performance or have annual plans, ARR (Annual Recurring Revenue), works well.

If you’re of a conservative bent, CMRR (Committed Monthly Recurring Revenue or Contracted Monthly Recurring Revenue) - which takes into account, confirmed upgrades and downgrades, and anticipated churn - could be your favorite metric.

Is MRR the ultimate metric for your business?

We’ll see.

Luke Howard, a British chemist, an amateur meteorologist, and 18th century’s foremost cloud enthusiast believed that, with clouds, one could read the “the countenance of the sky,” one could survey the sky’s moods.

The same could be said for metrics being observed in isolation, they let us make some sense of the moods of a business.

But just the way clouds, alone, cannot capture everything about the weather, unless we dig in and stack metrics against each other, and against our actions, we’ll never get a grasp of the ever-shifting fashion in which growth actually unfolds.

MRR isn’t everything, but it still serves as a vital tool for your mind.

How to calculate MRR?

There are two ways to go about it. First is to follow the summing up approach. Add all the monies that you receive for recurring plans and addons, from all your subscriptions.

Then there is the averaging out approach. Compared to the former, this might produce the shrugging of accuracy’s shoulders, but it’s a more efficient way to calculate MRR.

If you know the Average Revenue Per User (ARPU), then, all you have to do is to multiply that with the no. of paying customers, and the output will render the Monthly Recurring Revenue.

Again, to ensure that we’re dealing with accurate numbers, it’s essential to know what’s included in, and what’s excluded from the MRR calculation. Also. Divide the revenue from quarterly plans by 4, and annual plans by 12.

What is included:

  • All recurring plans & add-ons.
  • Coupon discounts.

What is excluded:

  • Setup fees.
  • Non-recurring add-ons.
  • Credit adjustments.
  • Other non-recurring charges.
  • Tax line items.

Now, let’s move on to how we can measure the movements of MRR.

How is MRR growth measured?

The percentage of month-over-month increase in MRR seems like a good growth signal. But this signal doesn’t save us from the gust of suspicion and surprise that might visit our cheeks.

Because, MRR, alone, leaves much room for the unexplained; and fails to produce answers for most inquiries we’ll have to make.

Let’s meet another Howard for a moment.

Investor Howard Marks once noted:

“First level thinking says, ‘It's a good company; let's buy the stock.’ Second level thinking says, ‘It's a good company, but everyone thinks it's a great company, and it's not. So the stock's overrated and overpriced; let's sell.’”

Precisely.

As metrics are nothing but tools that aid our decision making, they should provide fertile ground for Second-level thinking to originate from.

Which means, metrics should help us in questioning our assumptions, in knowing what really triggered that uptick in a graph, and in tinkering our strategy.

“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.” ~ Howard Marks

So. Dig. And dig some more.

Because encoded in the breakdown of MRR, is the key to better decisions.

Let’s look at its parts:

  • New MRR

    A special freshness attends this part of the MRR. It’s the revenue generated from new customers in a given month. The flashing outcome of a new campaign, or the slow, compounding result of your old Sales and Marketing efforts.

  • Expansion MRR

    If your promise prevails, the delivery of value compounds, and the customers become more successful, you’ll have upgrades, new subscriptions and addons to account for. All the new monthly revenue from existing customers, falls under Expansion MRR.

  • Contraction MRR

    All the downgrades from existing customers make it to the Contraction MRR. Was it inevitable? Listening carefully to your customers might lend some cues.

  • Churn MRR

    A cancellation, which is usually the marrying of frustration to the breaking of promises, is at the heart of this. Churn MRR tells you about the recurring revenue that was lost in cancellations. Ominous? Absolutely.

  • Net New MRR

    What would MRR be a few months down the line? What has contributed the most to it? Was it the new campaign, or referrals? Net New MRR includes the leaks, the false starts, and the left turns of revenue. It tells you how your business is really faring.

    Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churn MRR

    A word of caution for early stage startups.

    An exponential growth chart, contend some, means everything. But subscribing to this contention in the early days has its perils. As, typically in the first few months, when most numbers (revenue, churn) are smallish, growth rates can be misleading.

    Point Nine Capital’s Christoph Janz recommends a sensible thing to do: “In the first 12-24 months or so after launch, plan to get to your target number”, and once you’re past that period, you can deploy a month over month percentage growth target.

    Up for further digging?

Here’s how to look at MRR with segments

“This is the way the saints live, no complaints, no suspicion, no surprise. If it rains, carry an umbrella, if it’s cold, wear a jacket.” ~ Louis Jenkins

What it is. What it isn’t. What needs to be done. Segmenting your MRR further will help you size up reality as objectively as possible, and launch questions in the right directions. Here are few ways to look at it:

By plans: What is your most valuable plan? Which cohort of customers upgraded the most?

By geographies: Which country brought the most MRR?

By lead channels: The sign ups from the new Quora ads, are they any good?

By payment methods: Which was the most popular payment method by MRR, in France? Shouldn’t the checkout page emphasize that we support this method?

Where MRR fails

As we’ve learned, MRR isn’t perfect. Even after capturing all its movements, and the movements of churn, we’re still left with a skewed vision. Because MRR beams no light on the question of profitability.

“As a profitable, bootstrapped business it really doesn’t matter to us how nice our MRR looks. What matters is actual cash collected; that’s the fuel that keeps the lights on.” ~ Laura Roeder, MeetEdgar

Laura implores us to reconsider our excessive reliance on MRR. She makes a case for understanding how much does a business really make after all the expenses, and knowing how long one can run with the cash left in the bank.

David Cummings of Pardot suggests tracking the following Cash related metrics:
  • Cash beginning of month
  • Net cash burn
  • Cash end of month
  • Runway at current burn (months)

Another good read on the subject: How We Spend Money at Mattermark: What Goes Into Our Burn Rate? (a venture backed company’s perspective by Danielle Morrill)