Monthly recurring revenue (MRR) is a financial metric that shows the revenue that a company expects to receive monthly from customers for providing them with products or services. Essentially, MRR measures the company’s normalized monthly revenue. Revenue normalization is critical for companies that offer various pricing plans for their products or services.
MRR provides an average number for a company’s recurring monthly revenue. It is commonly used by Software-as-a-Service (SaaS) companies that generate revenues using a subscription-based model.
Although MRR is not recognized by the accounting standards such as GAAP or IFRS, investors still monitor the metric. By analyzing a company’s MRR trend from month to month, investors can quickly evaluate its growth. Therefore, most public companies that use a SaaS business model report the metric in their quarterly and annual reports.
When Do We Use Monthly Recurring Revenue?
Monthly recurring revenue offers some important applications for companies. First, companies calculate the metric for financial forecasting. Consistency and predictability of the MRR ensure that a company can easily forecast its future revenue. When a company sees multiple periods with consistent monthly recurring revenues, it can easily model revenues into the future.
Monthly recurring revenue is used to evaluate a company’s growth trends. Again, MRR provides a smooth and normalized view of the revenues. Thus, a company can determine consistent and comparable growth trends.
Types of MRR
MRR can also be broken down into several components that reveal how revenue is earned. The types of monthly recurring revenue include the following:
New MRR: Additional MRR earned from new customers
Expansion MRR: Additional MRR earned from current customers
Churned MRR: MRR vanished due to the customers’ cancellations of subscriptions
The three MRR components above allow us to calculate the Net New MRR. The net new MRR indicates the sources of MRR that cause an increase or decrease relative to the previous period.
How to Calculate MRR?
MRR can be generally calculated in two ways:
1. From the Revenue per Customer
The easiest method to calculate the monthly recurring revenue is by determining the monthly recurring revenue per customer. First, we calculate the monthly revenue from each customer. Then, we find the sum of all revenues obtained from customers.
2. Using Average Revenue per User (ARPU)
Another method to calculate the MRR is by using the average revenue per user (ARPU). The first step in this method is the calculation of the monthly ARPU. It can be done using the following formula:
Note that all figures used in the formula above must be determined on a monthly basis.
After identifying the company’s monthly ARPU, calculate the MRR using the formula below:
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