MRR or Monthly Recurring Revenue

Posted by Ivan Osmak
on October 5, 2017

What is MRR?

MRR or Monthly Recurring Revenue is a KPI specific for SaaS (Software as a Service) businesses. In SaaS business model, customers pay regular (typically monthly) subscription for a software, as opposed buying it at once.

MRR may seem deceptively simple as a KPI, but there are many nuances to it that we will cover in this post.

In the most simplest form:

MRR = Sum of all monthly fees your customers pay

What is MRR used for?

Perhaps most important thing to understand about MRR is the reason why we want to calculate it and track it. MRR is often confused with cash-flow and accounting related metrics. Most importantly, MRR should never be confused with Revenue.

The best way to think of MRR is as a general indicator of the direction and momentum of your business.

Components of MRR

When calculating MRR on monthly basis, to have a better grasp of your business it is important to break it into following components:

  • New MRR – New MRR coming from new customers
  • Expansion MRR – New MRR coming from existing customers (e.g. more seats or upgrade to a higher plan)
  • Churned MRR – MRR lost due to cancellations or downgrades
  • Net new MRR – Sum of New MRR and Expansion MRR from which Churned MRR is subtracted
Sample: Plotting MRR components over time
Sample: Plotting MRR components over time

Nuances of calculating MRR

At the moment, there are still no hard, objective rules for calculating MRR. Therefore, when reporting MRR it is advisable to also mention the specifics of how the metric was calculated.

Following examples illustrate some of the nuances that come about when calculating MRR:

  • How do you calculate MRR when some customers are on a monthly plan, some on a quarterly plan and yet others are on an annual plan?
  • What happens if a customers card is declined?
  • What happens if collection on an annual prepayment is late?
  • What happens if customer adds another seat in the middle of a month?

What should be excluded from MRR?

MRR should include only recurring revenue, so following should typically be excluded:

  • one-time charges, such as training or setup fees
  • add-ons, unless they are being charged regularly
  • taxes

How to calculate MRR growth?

While there are several ways to measure MRR growth, MoM (Month-over-Month) is the most used one.

To calculate it, one needs to calculate Net MRR for the two months and calculate the percentage difference.

Net MRR = Net MRR + New MRR + Expansion MRR – Churn MRR

So, let us assume following example:

August 2017:

  • Net MRR = $14,000

September 2017:

  • New MRR = $1,200
  • Expansion MRR = $800
  • Churn MRR = $200
  • Net MRR = $14,000 (August 2017) + $1,200 (New MRR) + $800 (Expansion MRR) – $200 (Churn MRR) = $15,800

Then, to calculate MoM growth between August 2017 and September 2017 we use following formula:

MoM MRR growth % = (Net MRR September 2017 – Net MRR August 2017) / Net MRR August 2017

MoM MRR growth % = ($15,800 – $14,000) / $14,000 = 0.13 = 13%

MRR and OKRs

MRR, it’s various components and MoM MRR growth are great choice of key results for many top level objectives.

MRR itself as well as MoM MRR growth, is often a key result tied to a top level objectives, such as:

  • Achieve initial traction
  • Get ready for round A
  • Become profitable
  • etc.

Various components of MRR, such as New MRR, Expansion MRR and Churn MRR are ideal key results for more specific objective such as:

  • Get churn under control
  • Turbocharge new sales
  • Establish account executives team

How to calculate MRR in Gtmhub and use it as a key result?

Gtmhub connects to numerous systems from which MRR and MRR related data can be extracted. From payment providers such as Stripe, Chargebee or Paidlabs to accounting software, such as QuickBooks.

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If you do not have a dedicated system which already provides you this information, Gtmhub also can connect to Excel or Google Sheets, or pretty much any database – such as Redshift, MySql, MongoDB…

The ability to write custom formulas and algorithms, makes Gtmhub a perfect tool to generate any KPIs and subsequently attach them automatically to your OKRs.