What is monthly recurring revenue?

MRR stands for Monthly Recurring Revenue and is a predictable recurring revenue produced by your business from active subscriptions (often paid automatically through a credit card or another means of automatic payment collection). MRR includes recurring charges like expiring discounts, coupons, payment fees, and add-ons but excludes one-time fees and expenses.

With the help of committed monthly recurring revenue, you can approach the business's financial health and get a sense check about the deferred revenue growth and future revenue, which will significantly reduce the complexity of budgeting, projecting, and extrapolating your business.

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How is MRR calculated?

Calculating MRR is simple, and most platforms that offer assistance on MRR management will help you closely monitor your MRR. All you need to do is count your recurring plans or products and multiply them by the number of users each plan has.

MRR Formula:

MRR = number of users * monthly committed revenue. 

Suppose you have gained 20 users over a month, and they subscribed to a $100 one-time setup fee, and an $1,000 monthly plan.

Then, your MRR calculation will be $20,000, and your total revenue will be $22,000 due to the one-time setup fees.

Calculating New MRR

With the growth in your business, it becomes essential not to only look out for the churned, lost, and new MRR. Along with that, different other widening factors the growth of MRR.

So, there is a different formula for the Net New MRR calculation. For that, we need three factors named as: 

• New MRR - Any additional monthly revenue from new customers
• Expansion MRR- Additional monthly revenue from existing customers.
• Churned MRR- Lost MRR due to downgrades, cancellations, or payment issues. 

For the calculation of net new MRR, you need the following formula.

New MRR:

Net new monthly recurring revenue = New MRR+ Expansion MRR- Churned MRR

Remember if you have a greater churned MRR than the new or expansion MRR. Your company is shrinking in that particular month. Also, if you tend to report MRR to higher-ups, investors, or the management team, you would want to explain why the Net new MRR is either increasing or shrinking, as this is one of the absolute central metrics for any stakeholder for MRR-based companies.

Main benefits of using an MRR-based business model

Subscription-based business models come with a range of advantages:

• Predictability - There is no need to guess next month's revenue.
• Budgeting - Know exactly how much stock and staff you need and by when.
• Modeling - Forecast your business based on trends instead of guesswork.
• LTV - Increase and predict the lifetime value of your clients as purchases repeat.
• Product Consumption - Clients tend to use subscriptions more than one-time purchases.
• Churn - Improve churn, as you'll understand when clients churn

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Why is monthly recurring revenue important?

Monthly recurring revenue, or MRR, is a crucial indicator of a business's financial health and growth potential. This metric measures the monthly value of a company's monthly subscriptions to its customers. MRR is a key indicator for improving product-market fit because it represents a steady willingness to buy and validation of your company. Furthermore, MRR determines a company's success and long-term growth, as a subscription-based business model opens up so many opportunities, which the opposite does not.

Several factors can influence monthly recurring revenue, including:

• Quality and value of a company's products or services.
• Its marketing efforts and the overall strength of its customer base.
• Especially the Mid-funnel and bottom-funnel aspects of a company's marketing mix will drastically amplify potential MRR growth.

To improve the monthly recurring revenue generated, businesses must carefully manage these factors to build and maintain strong customer relationships and ensure that customers expand their accounts over time instead of shrinking them.

Some strategies that may help companies improve their monthly recurring revenue include optimizing their pricing models and investing in marketing efforts to increase brand awareness and attract new customers. Increasing regular monthly payments can significantly impact a company, helping to improve key business metrics such as growth rate, profitability, and customer retention.

By generating a stable and predictable revenue stream, MRR allows businesses to manage their cash flow better, plan for future growth, and invest in initiatives to help them achieve their long-term goals. Additionally, by improving customer relationships and increasing customer satisfaction, monthly recurring revenue can lead to aggressive upwards revenue spirals, higher retention rates and more loyal, engaged customers. As a result, companies focusing on improving their monthly recurring, predictable revenue can expect significant improvements in key business metrics and overall success.

What is ARR vs. MRR?

MRR and ARR are essentially the same, but ARR stands for annual recurring revenue and is essentially MRR extrapolated over 12 months, assuming that your customers stays loyal and don't change their plan.

Calculating ARR:

ARR = MRR * 12 months

There is still some difference between these two terms, so let me elaborate on the difference for you:

• MRR is a commonly used recurring revenue recommended for developing businesses, especially for contracts between months to one year. But, an ARR assumes that the revenue will continue unchanged for 12 months or is sold directly on a yearly contract. So, when you multiply MRR by 12, you will get ARR. 
• Another difference between these processes is that MRR is just a general operating metric, whereas ARR is more of a valuation metric in the eyes of stakeholders.
• MRR presents your day-to-day growth and operation, but when it comes to ARR, you will be able to understand the full business performance. In simple words, MRR is a short-term operation result, and ARR tends to be long-term.
• Furthermore, ARR is recommended when you need to sign a deal for multiple years, and MRR is suitable for a business selling monthly subscriptions or new beginner companies in general.

What is considered a good MRR rate?

There's no one size fits all answer to this question. Still, as a general rule, you need a minimum of US$1-5k MRR to be considered early validated and investable. It is hard to make meaningful conclusions on anything lower than 1k MRR. MRR directly correlates with your business's valuation, as this revenue can be validated and comes from various sources, such as subscriptions, ad revenue, or affiliate sales.

Companies must have a solid business model and a strong product or service offering to achieve this result and attract investors. They must also be able to demonstrate and consistently deliver growth in monthly recurring revenue over time. This may require investing in marketing efforts, sales outreach, and monitoring customer satisfaction and retention closely.

Whether a company is successful and investable depends on several factors, including its industry and market position, business strategy and growth plan, and ability to execute that plan. But at the end of the day, monthly recurring revenue is one of the key indicators that a company is poised for success.

What is MRR in valuation?

MRR can be an important indicator of financial development and balance for companies looking to increase or estimate their valuation.

Monthly recurring revenue, or MRR, is an essential indicator of a company's financial health and overall value. This is because MRR reflects the stability and predictability of a company's revenue streams, which are key factors that investors look for when determining a business's valuation and risk profile. Several different factors can impact a valuation partially based on MRR, including:

• The number of monthly paying customers.
• The growth trends over time in MRR month-on-month or year-on-year.
• Trends in customer churn and expansion MRR rate.
• Profits margin from MRR

Understanding the details of any MRR based business model is essential for businesses looking to raise capital or expand their company. Investors and stakeholders will typically look at a company's historical monthly recurring, predictable revenue trends to determine its potential growth trajectory and overall value. Additionally, companies can use monthly recurring revenue as a benchmark for measuring their performance and setting targets for future growth, which should be possible if applied the right effort and tactics. MRR is essential for evaluating a subscription-based business's long-term health and success.

Examples of successful companies using monthly recurring revenue 

As more businesses shift towards a monthly recurring revenue (MRR) model, numerous examples of companies have found success through this model. MRR-based business models have adopted popularity, especially within software companies and productized services. Successful companies that use monthly recurring revenue as a core component of their business include:

Netflix:

One of the most well-known examples is Netflix, which has built its entire business around its subscription model. With millions of subscribers across the globe, Netflix has become a leader in the video streaming industry and continues to grow its user base year after year.

DROPBOX:

Another example is Dropbox, which offers users cloud storage capacity through monthly subscription plans. By offering an affordable and easy-to-use solution, Dropbox has grown to become one of the world's most popular cloud storage providers, with MRR and ARR at its core.

Blue Apron

Another excellent example of the power of MRR is the subscription-based meal delivery company Blue Apron. Their MRR grew from $21 million in December 2014 to $100 million in September 2015 due to increased customer retention and new subscribers. The company achieved this growth by offering discounts and promotions to new customers and using personalized marketing strategies to target existing customers. It has ensured a solid and unique advantage for Blue Apron in managing and forecasting its financials, as its revenue and revenue growth seems to be highly predictable, trickling down throughout the organization.

Blue Apron also offers a variety of subscription plans, ranging from weekly to monthly deliveries and different meal selections, which gives customers more options and flexibility. This MRR success is a testament to the power of creating a subscription-based revenue model, and nailing customer retention and product market fit simultaneously.

Amazon Prime

Finally, Amazon Prime is another well-known company that has seen great success with its monthly recurring revenue model. With a wide range of benefits and services, including free shipping and streaming video content, Amazon Prime continues to be one of the most popular subscription services available today. Whether you're a consumer or a business owner, using MRR can help you increase revenue and build a loyal customer base.

Conclusion

Do you have a business, or are you considering starting one? If so, consider switching or including an MRR-based business model to enjoy all the benefits of monthly recurring revenue. Working will MRR is a potential game changer. Reach out to us today and understand how our clients elevate their business with strategies such as MRR.