Monthly Recurring Revenue, or MRR, is one of the primary ways for subscription businesses to track success and plan for how much revenue to expect going forward. Specifically, it measures the total payments generated by a subscription plan within a month.
The simplest way to calculate MRR is adding up individual customer payments.
MRR = (Customer A’s Monthly Fees) + (Customer B’s Monthly Fees) + (Customer C’s Monthly Fees) etc.
If customer A spends $50 and customer B spends $150, then your monthly recurring revenue is $200.
As your business grows, it’s important to track your growth and the sources behind it. To calculate your growth, the most commonly used formula is:
Net MRR Growth = New MRR + Expansion MRR – MRR Churn
This gives you a number that demonstrates your overall growth, but it’s only part of the picture. You also need to know where that growth is coming from to highlight what’s working and what could be improved upon.
New MRR refers to the MRR brought in by new subscribers acquired during the month. This usually provides the bulk of MRR growth.
Expansion MRR comes from existing customers spending more on your services. This can be accomplished by upselling (when a customer upgrades their plan) or cross-selling (when a customer purchases additional services or products). Both cross-selling and upselling are excellent opportunities to increase your MRR. Customers that already have a positive relationship with your brand are the most likely to buy more.
Not to be confused with customer churn, MRR churn occurs when customers cancel or downgrade their plans. If one customer cancels their $200 plan and another downgrades to the $100 plan, your MRR churn would be $300.
While all of these elements are informative on their own, the formula is still a useful way to condense your overall MRR growth into a single number. Increasing this number should always be a priority but focusing on the individual parts of the formula will provide your team with valuable insights.
The most important element for growing your MRR is to provide a great product and positive overall experience at every customer touchpoint. Once you have that down, you can more easily acquire new customers and, perhaps even more importantly, keep your existing customers engaged. Therefore, there are a few aspects that you need to ensure are continually optimized to grow your MRR.
A price that’s not optimized can significantly impact your MRR. A price that’s too high could alienate potential customers but one that is too low could undercut the amount of revenue you should be earning. The majority of SaaS businesses spend less than 6 hours total considering their price points, and professionals recommend re-examining prices every 6 months.
Try testing different price increments to see how it affects purchases. If you do find that a price increase is warranted, make sure that you clearly communicate it with customers.
Offering people more choices means that you can capture and retain more customers. For example, having a comprehensive product with lots of features can be a great thing for many, but some users won’t be interested in having all the bells and whistles. Try offering individual services and products in addition to bundles of products for a better price.
Keeping your existing customers is much easier and less costly than acquiring new ones. With that in mind, you need to make your every interaction with your company is a positive one for customers and that they are continually getting more value. This means an easy-to-use product and an overall ecommerce experience that is as frictionless as possible when it comes to the initial purchase and recurring payments.
Subscriptions are great because they provide predictable, ongoing revenue for businesses. But subscriptions also come with the challenge of not only acquiring new customers, but also retaining existing ones. Your recurring billing service should make it easy to tracking your MRR and your MRR growth as they are are vital to understanding how you’re doing in creating successful customers and, by extension, ensuring your own success.
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