SaaS Insights: Monthly Recurring Revenue

What is MRR?

Monthly Recurring Revenue, usually referred to as MRR, is one of the most important metrics for any business with a recurring fees pricing model. It is also the reason why SaaS business model is so popular.

The purpose of calculating MRR is to provide a metric to track predictable and recurring subscription fees. In most cases, it excludes one-off set-up fees and variable components. However, it depends largely on the business nature.

A related metrics will be the Annual Run Rate (“ARR”) which provides an insight into the recurring revenue on an annual basis.

How to calculate MRR?

Broadly, there are two ways to calculate MRR:

Customer by Customer method

Personally, I would recommend keeping track of the monthly fees paid by each customer.

This would allow you to perform more in-depth segmentation and batch analysis.

For example, you might have three customers. The first customer opted for plan A (at $29 / month) while the other two customers opted for plan B (at $49 / month).

 MRR = Sum (Monthly Fees Paid by Active Customers) = ($29 + $49 + $49) = $129

Average revenue per account (“ARPA”) method

For companies without a well-established customer monthly fees database, a quick and dirty way to calculate MRR is using the average revenue per account. Basically, you will use the ARPA multiply by the number of payment customers.

For example, you know that your ARPA is $30 per month and you have five customers. In this case, your MRR will be $150.

MRR = Number of paying customers x ARPA = 5 customers x $30 per month = $150

What are the common mistakes when calculating MRR?

Adjustments are not made for non-monthly billing intervals

One of the most common mistakes is to confuse bookings with MRR. In most SaaS companies, packages are offered with different billing periods – quarterly, semi-annual and annual. When the full price of these non-monthly packages is valued into MRR, it will cause MRR to appear volatile.

For these long-term subscriptions, the amount should be divided by their billing period before adding to MRR.

Including set-up fees and other one-off payments

Many SaaS companies have included a set-up fee component. The nature is usually one-off at the start of the engagement. While this component is good for cash flow, we should not consider them as part of MRR. Essentially, MRR provides us with insights into the recurring revenue base. Also, we have also noticed that some SaaS companies decentralize the set-up to resellers in order to scale. Hence, we might not be able to assess the scalability factor of a SaaS business model if we include the set-up fees.

Including Trial Customers and Not Taking into Consideration Discounts

In MRR, we should only take into consideration the actual fees paid by the customer. Hence, we should not include trial customers as they have not started paying. In any case, the conversion from trial customers to paying customers is not as high as you think.

Also, it is relatively common for a SaaS company to provide discounts during the promotional period or when their sales team provides sweeteners to close a deal. However, we need to re-emphasize that we should use the discounted fees (rather than the full fees) when we calculate MRR.