When it comes to measuring revenue, there are tons of metrics out there to help us calculate it. But for SaaS companies, there is one that reigns supreme – the Monthly Recurring Revenue metric (MRR). This metric is a great way for subscription-based companies to accurately measure and forecast their monthly revenue quickly. Plus, MRR has a load of variations that allow you to delve deeper into your current strategy.
So, what exactly is MRR? How do you calculate it? And what will it actually tell you about the success of your business? We’ll answer these questions and more, including:
- What is MRR in SaaS?
- Importance of tracking MRR in SaaS
- How to calculate MRR
- Types of MRR
- 4 ways to increase your MRR
- SaaS MRR benchmarks
Let’s get started!
What is MRR in SaaS?
MRR stands for Monthly Recurring Revenue. It helps you to calculate how much income is generated per month by your product or service. The metric focuses on the overall revenue generated through recurring costs.
MRR is one of the main customer success metrics to determine how effectively your product or service fulfills your customers’ expectations and needs. MRR is one of the most useful metrics for any SaaS company. Why? Because of the subscription model. As MRR focuses on recurring revenue (which is exactly what a subscription is), it gives SaaS companies a pretty accurate and reliable idea of their monthly income in just a single calculation.
However, it’s important to note that the MRR metric will miss out on one-time fees such as upgrades or cross-sells. Luckily, there are a few variations of MRR that help overcome this.
Importance of Tracking MRR in SaaS
MRR is especially important for SaaS companies since it works so well with subscription-based income. But MRR is also super useful when it comes to calculating other metrics. For example, you can use different MRR results to calculate your business’s Net Recurring Revenue (NRR).
Moreover, the MRR provides helpful indicators of what’s going on behind the scenes. A drop in your MRR suggests that your churn rate has increased, which may mean you need to focus on customer acquisition or solving the cause of the churn.
As you calculate your MRR over the months, you can easily map your company’s growth or progress over time, allowing you to accurately forecast what your MRR rate might look like in the future. With this data, you can effectively anticipate changes in your strategy, keeping you ahead of the curve.
How to Calculate MRR?
Use the following formula to calculate MRR:
- Number of customers: The number of customers who have a monthly subscription to your product or service
- Average billed amount: The average monthly subscription rate the customers pay.
For example, let’s say your SaaS company charges €30 per month per customer. You currently have 500 customers who are subscribed to your product.
Your MRR would be €30 * 500 = €15,000.
As your business grows, the way you calculate your MRR might change. For example, if you offer multiple subscription packages, you might calculate the MRR per subscription package and combine them to get the overall MRR.
There are other MRR metrics that can help you calculate other variations of your revenue and even uncover more insights. Let’s take a look at them.
Types of MRR
Here are the 5 variations of the MRR metric which you can use to identify specific elements of your strategy. The following calculations help you answer the question of “why” your company may be experiencing changes in your overall revenue.
- New MRR – MRR gained from new customers
- Expansion MRR – Additional MRR from existing customers, including upgrades, add-ons, and cross-sells
- Reactivation MRR – Total MRR gained from winning back previous customers who had churned
- Contraction MRR – MRR lost from existing customers through downgrades, cancellation of add-ons, etc
- Churned MRR – MRR lost from customers who have canceled their subscriptions permanently
4 Ways to Increase Your MRR
Like all metrics, maximizing your MRR involves optimizing your strategy according to your business. Of course, maintaining a product-led approach by constantly monitoring and improving your product’s performance is a no-brainer. But here are our top 4 tips to increase your MRR that you can implement alongside your product-led approach!
1. Update your Subscription Pricing Model
Your subscription pricing model could be the make or break of your business. If customers don’t feel like your subscription packages aren’t good enough, they’ll find business elsewhere. There are so many different types of subscription models you can use, from usage-based pricing to tiered pricing, and each offers its own unique pros and cons, depending on your type of SaaS business.
We recommend researching each pricing model thoroughly and determining which model offers your business the most opportunity to maximize your customer base. Check out this article on different pricing models in SaaS for more information.
2. Increase your Prices
It sounds simple, and it is! As your business grows and becomes more established, so should your pricing. It may seem daunting to increase your prices, and you may think the risk of churn will increase. But it’s important to remember that your product or service is solving a huge issue for your customers, and they wouldn’t be here if they didn’t love your product.
Test it gradually by increasing your products for a month and see what happens – if you’re a product-led company, we can almost guarantee your customers will stick around.
3. Focus on expansion: add-ons, upselling, etc.
We all know it’s much more cost-effective to focus on upselling your current customers than it is to acquire new customers from scratch. Have your marketing strategy focus on your loyal customers by offering unique add-ons or subscription upgrades that will personally improve their own operations. Upselling is a win-win situation for all; you get more money, and they get more value!
4. Eliminate “Freemium” and “Unlimited” Plans
Although a freemium model can help your business communicate its value to new customers, it can really limit your revenue potential. Adjusting your freemium to an extended free trial is a good way to go – that way, customers can experience the total value of your product before making a decision to purchase.
And the same goes for unlimited plans. It’s very likely you’re charging very little and offering too much! Revisit your unlimited plans and identify which businesses might be getting too much out of them. By adjusting your subscription pricing model and eliminating your unlimited plans, you can ensure the value-to-revenue ratio is balanced.
So, you’ve applied the above best practices to maximize your MRR. But how do you know whether they’ve worked? Let’s check out the MRR benchmarks you can use to measure and ensure you’re well on your way to success.
SaaS MRR Benchmarks
There’s no real opportunity for exponential growth when it comes to your MRR. Instead, depending on your current situation, you should experience a slow and steady increase or decrease in your MRR.
There are no real benchmarks for MRR since it’s all relevant to your business size, product/service, and customer market size. However, it’s important to note that smaller companies will experience a much higher MRR growth rate than larger companies.
According to Adobe EchoSign’s Co-Founder, Jason M. Lenkin, once your SaaS company has reached around €1 million of Annual Recurring Revenue (ARR), an ideal target of the month-on-month growth rate of MRR is around 10% or more.
What is a Good MRR for a SaaS Company?
Calculating the MRR of your SaaS company is an extremely reliable and accurate source of revenue data, thanks to its use of recurring revenue. MRR is just one of the very many metrics you can use to accurately monitor the performance of your product and business.
Although there is no set value for a good MRR total for any business, you should aim for an MRR growth rate of around 10% per month.
If you find that your MRR growth rate is dropping, first use the MRR variations to identify the underlying problem. Then, use the best practices listed above to solve them – from something simple like increasing your prices to updating your pricing models, you can optimize your monthly revenue without sacrificing customer success.
Looking for more customer success metrics? Check out our full guide to customer success metrics in 2023!