February 6, 2023

All you need to know to calculate monthly recurring revenue

Vincent Gouedard
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Among the SaaS KPIs essential for managing a company with recurring revenues, MRR or monthly recurring revenue often comes out on top. But do you know all the ins and outs of how it’s calculated? This comprehensive guide will show you how. You’ll also discover why MRR is fundamental to performance analysis, and therefore to the strategic management of a SaaS business.

1 - What is monthly recurring revenue?

Monthly recurring revenue (MRR) is used in business with recurring revenues, notably those with subscription-based revenue such as SaaS.

💡 Please note that MRR should not be confused with monthly SaaS sales (which may include non-recurring sales, such as setup fees).

1.1 - MRR definition

MRR is a financial indicator that measures the monthly recurring revenue generated by a company. It is calculated by multiplying the number of paying customers by the monthly amount of their subscription.

A SaaS typically offers pricing packages in the form of monthly, quarterly, half-yearly, or annual subscriptions. In the last three cases, SaaS companies calculate monthly revenue by dividing the subscription price by the number of months it runs.

MRR includes committed revenue as it is based on contracts taken out. It enables the company to plan for the future and draw up forecasts, notably when analyzed alongside churn rate.

1.2 - Difference between MRR and sales

Sales is an accounting concept that measures the volume of customer sales over a given period (invoiced sales). It reflects business performance between two dates (month, quarter, financial year, etc.).

MRR is not an accounting concept. It is not calculated according to accounting standards. It does not generally correspond to the tallying of sales made between two dates. Rather, it is an overview of monthly committed revenue in the current subscription base.

2 - How do you calculate MRR?

MRR involves a few special considerations. Here’s how to calculate MRR, with a concrete example to illustrate the difference with sales.

2.1 - Formula and example for calculating MRR

The classic formula for determining MRR is as follows:

MRR = number of current subscriptions X monthly amount of each subscription

💡 Let’s take a concrete example:

In a given month, the company markets and collects revenues from 15 monthly subscriptions, each costing 120 euros, and 5 annual subscriptions, each costing 1,200 euros. Hence:

• MRR for the period is (120 X 15 + (1200/12) X 5), i.e. 2,300 euros

NB: some customers’ subscriptions may run for a specific number of months or weeks. In such cases, MRR is calculated by dividing the total amount of the subscription by the number of months it runs.

2.2 – Special considerations and options for calculating MRR

In addition to this easy-to-apply calculation formula, there are a few other options to consider when it comes to MRR.

A – Handling of rebates, discounts, and refunds

A marketing campaign may offer customers a one-off discount if the subscription is taken out during a given period. By excluding these discounts from the calculation, you can optimize the amount of your MRR.

If an MRR calculation is then used to draw up forecasts based on these special revenues, it’s best not to incorporate them to begin with. You can correct your MRR or ARR (which corresponds to the annualization of MRR) projections to incorporate a more consistent average annual discount rate.

B – What about revenue churn

Revenue churn corresponds to the level of MRR lost or reduced as a result of the cancellation or contraction of subscriptions. When calculating MRR, you can choose between 2 ways of taking churn into account:

• on the date of unsubscription;

• the effective end date of the subscription (end of month or end of annual period for an annual contract, for example).

C – MRR—exclusive or inclusive of VAT

The vast majority of SaaS contracts calculate MRR exclusive of VAT, as VAT does not contribute to SaaS performance. There are, however, 2 exceptions:

• Some SaaS calculate MRR both with and without VAT, especially when the customer is B2C and does not recover VAT.

• For cash flow budgeting, calculating MRR inclusive of VAT can help provide a detailed overview of VAT collected on monthly subscriptions

3 - Why is MRR an essential SaaS KPI?

MRR is a key indicator for any company with recurring revenues. It’s one of the KPIs you need to monitor right from the start of your business, i.e. from the first customer who signs up for a subscription.

3.1 - A recurring business model

All tech companies that sell services on a subscription basis need to consider MRR. Recurring revenues are even part of the business model. So it’s only logical that the MRR indicator should be the key to driving customer sales growth, monitoring service profitability, and managing cash flow.

3.2 - Measuring recurring revenue shipped each month

Committed revenue corresponds to revenue generated by customer commitments, i.e. existing subscriptions. MRR reflects this parameter perfectly, insofar as it is calculated based on current subscriptions. This is an essential factor in sales and company forecasts.

3.3 – MRR for investors

A SaaS that has raised funds, or is considering doing so, must provide investors with the financial information they want to see the most. MRR is one of the most closely watched KPIs, even if the current economic climate means that profitability and cash burn are also closely monitored.

💡 Find out more: Top tips for communicating with SaaS investors

3.4 – MRR for analyzing performance

Analyzing changes in MRR provides a wealth of information. It can lead SaaS to take corrective measures or review its sales strategy.

Here’s how to break down the changes in MRR over a period:

• (+) new MRR, i.e. revenues from new customers;

• (+) MRR expansion, i.e. revenues generated by customers switching to a more expensive offer;

• (+) MRR reactivation for subscriptions reactivated over the period ;

• (-) MRR contraction, i.e. the drop in revenue due to customers switching to cheaper subscriptions;

• (-) churn, lost revenue due to unsubscriptions.

Monitoring MRR growth on Fincome
Monitoring MRR growth on Fincome

Monthly recurring revenue is an essential KPI for SaaS management. If you want to integrate MRR into your reporting and analyze it on a regular basis, Fincome offers you an automated, reliable online tool that directly links to your applications. Request an online demo to see how integrating MRR into your reporting immediately benefits your business.

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