PICTURE

Monthly Recurring Revenue and Its Uses

Monthly recurring revenue (MRR) is a key metric in evaluating the performance of any subscription business. It is simply the sum product of the number of unique business subscribers and the price of the monthly subscription plan. In this article, we will cover the different types of MRR, their uses, and how to calculate them.

MRR is important for projecting future growth and measuring the effectiveness of previous business decisions. It is an important metric in financial models for software-as-a-service (SaaS) companies, often taken into consideration with customer lifetime value and churn rate to evaluate the effectiveness of the current business and price model. Additionally, investors have certain growth expectations in mind when considering an investment and need to see a benchmark MRR growth rate. Hence, keeping an eye on MRR and driving sales to meet MRR growth targets are key in securing investor funding.

Types of MRR and Their Uses

There are 5 different types of MRR, with each providing a different insight into the performance of a business. In this section, we will explain how each MRR is calculated (refer to Figure 1 for the detailed steps) and used by different businesses.

  • Total MRR: refers to the total revenue generated from subscriptions in that month.
  • Average Return Per Account (ARPA): refers to the average revenue generated per user. Calculated as Total MRR divided by the total number of paid users.
  • Annual Run Rate (ARR): used to gain an understanding of the projected revenue based on the most recent MRR. Calculated as the product of Total MRR and 12 months. Usually, this is a more meaningful value than annual recurring revenue (trailing twelve months revenue) for fast-growing companies that offer monthly subscriptions.
  • Churn MRR: refers to the total potential revenue lost due to subscriber churn. Calculated as the product of the number of cancelled subscriptions and ARPA. Note that a more specific breakdown can be obtained for each subscription tier, but the calculations involved can be very tedious depending on the pricing model.
  • Expansion MRR: refers to the total revenue gained by upselling higher value subscription plans. Calculated as the product of the change in ARPA from the previous month and the total number of paid users.

For fast-growing start-ups, emphasis should be placed on Total MRR and Churn MRR as they reflect overall growth and product-market fit respectively.

Conversely, a medium-sized enterprise might be more focused on improving profits and thus place greater focus on expansion MRR. However, expansion MRR can be negative for companies expanding overseas due to lower-priced offerings in foreign countries causing a decline in ARPA. In such cases, the business could consider separating the local and foreign MRRs to calculate individual MRRs for each pricing model.

Furthermore, not all SaaS-model companies charge monthly. Often, platforms will offer annual subscriptions at a lower cost per month to secure revenue for a longer period. In such cases, MRR can still be calculated by blending the monthly returns of annual accounts with those of short-term subscribers.

How to Increase MRR

Generally, there are three main ways to increase a company’s MRR: 1) increase the ARPA; 2) increase the number of monthly users; and 3) reduce the churn MRR. Each of these goals requires different strategies.

Increasing ARPA involves increasing subscription prices or upselling higher-tier memberships. Increasing subscription prices without losing customers often requires bringing more value to customers. A good example would be Amazon Prime, where price increases were accompanied by new perks such as Amazon Prime Video and 2-day deliveries. Thus, a company would need to focus on product development and deliver additional services that customers would be willing to pay more for.

Increasing the number of monthly users usually comes in two manners: organic and inorganic growth. When a company is small, organic growth is often small and insignificant as the business reputation is not well-established and consumers are not aware of its product or service. As such, growing an early-stage start-up often requires heavy investment in advertising to increase exposure and drive inorganic customer growth. Often, initial subscription benefits are also given out to attract new customers to join your platform.

Reducing churn requires the business to continually engage inactive users who might not be fully utilising their subscription and are considering cancelling the subscription, thereby reminding users of the value that the service brings to them. In fact, as companies mature, retaining customers will become more cost-effective than simply acquiring new customers, thus companies ought to place greater emphasis on reducing churn MRR.

Ultimately, the way a company calculates and uses MRR is very much dependent on its business objectives and the nature of the business. As long as a company knows how to calculate and use MRR to its advantage, the company can certainly thrive in any type of business environment.

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