What is monthly recurring revenue (MRR)? MRR calculates all revenue a company generates monthly. Most commonly, software as a service (SaaS) companies use the metric of MRR to document their monthly income from recurring revenue generated by their subscriptions.
SaaS companies have a variety of subscription options for their services. Customer subscriptions tend to fluctuate monthly, so tracking your MRR is one of the best metrics to see how your business is doing financially over time.
Calculating MRR is easy
Here’s how you calculate MRR: Find the amount all customers pay you on average, and multiply it by your total number of customers for that month.
MRR = Average revenue per customer x Total # of active customers
For example, say you have 20 customers. They’re spending an average of $100 per month. Therefore, you multiply 20 x $100 for an MRR of $2,000.
The five types of MRR
Knowing your MRR helps you better understand the inner workings of your business. If you want to get even more detailed with your MRR, you can divide it into five types:
- New MRR: Subscriptions from new customers
- Expansion MRR: Upgraded subscriptions from existing customers
- Reactivation MRR: Reinstated subscriptions from customers that left and came back
- Contraction MRR: Downgraded subscriptions from existing customers
- Churned MRR: Canceled subscriptions from existing customers
Increase your profits by analyzing MMR data
Tracking each type of MRR helps you understand why your monthly profits may have increased or decreased and what areas of your business are doing well or need work.
Imagine the scenario where your overall MRR is steadily increasing. It’s a good situation to have in business, but you want to dig deeper to ensure the company grows healthily and sustainably.
If you were only tracking MRR as a single metric, it would be hard to find out what spurred the profit increase. But if you have data on the five types of MRR, you can see that while your New MRR is consistently increasing, your Contraction MRR is also growing, thus limiting your profits.
This information shows that the work you’re doing to gain new customers is successful and that your attention might need to shift to preventing downgrades so that your profits don’t suffer as a result.