There are many interpretations floating around the web but we have learnt it by trial & error. We thought of documenting it again as a primer for understanding basics of SAAS Metrics for our customers.
Here is an attempt to make it simpler.
What is MRR?
Monthly Recurring Revenue is normalised monthly revenue, based on all recurring items of a Subscription.
If you are new to building a Subscription business, you may be hearing the term MRR often associated with your financial reports. You may be wondering, doesn’t monthly revenue indicate what is necessary about the startup’s financial health?
What is so special about this term MRR? It is a fair question to ask.
The spikes & troughs of traditional revenue method hides too much information about how well the business is doing. MRR gives the true picture of health of a Subscription Business.
Consider this simple scenario:
- Annual plan charges for Plan A is $1200.
- Monthly plan charges for $100 for Plan B.
Say, you have 1 customer on Plan A and 10 customers on Plan B. In the first month your revenue is $2,200. The next month the Plan A customer does not pay as he has pre-paid for the period. So that makes your monthly revenue $1,000 [10 * $100, only Plan-B customers would pay].
Does this mean that your revenue is going down? On the contrary, it is stable because you are still serving the same number of customers as last month. Because the monthly revenue is not giving the true picture of a Subscription Business, MRR gives you the true health of your business.
How do you calculate MRR?
Let us take a deeper look at how to calculate MRR for the above example.
As the name indicates, MRR is calculated for a monthly “duration”. Any payment other than a month’s duration needs to be normalized for a month. As in our example, a $1,200 paid annually should be normalized as $100 per month in MRR.
It is fairly simple for a plan based charge alone. But as a subscription business you tend to have a mix of one-time & recurring charges for a customer and it helps to understand what should be considered as part of MRR calculation and what should be excluded.
What is included in MRR calculation:
- All recurring plans & add-ons.
- Coupon discounts.
What is excluded in MRR:
- Setup fee.
- Non-recurring add-ons.
- Credit adjustments. ++
- Any non-recurring adhoc charges.
- Amount charged towards Tax.
To understand this better, let us look at another example of a Customer Subscription.
Example of MRR calculation:
Consider the following subscription having a:
- Plan with price of $100 per month.
- Recurring add-on of $100 per month.
- Non-recurring add-on of $100.
- Discount coupon for $50 per month.
Invoice amount for the above subscription is: $250.
But the MRR for the Subscription is: $150.
Here is how it is calculated: (Plan price of $100) + (recurring add-on of $100) – (Discount of $50) = $150 in MRR.
The non-recurring add-on is excluded in this case, as it is not part of the recurring revenue.
Some folks tend to exclude discount from MRR calculation, which we strongly disagree with because it is not money received. So it makes sense to factor discounts and subtract that amount in MRR calculation.
MRR for your business is the aggregate of all individual Subscription MRR.
This is just for the basic understanding of what MRR is and how it is calculated. Based on MRR, you can align your business decisions and there are some details that MRR does not reveal which only a CMRR does. We will cover those in a subsequent blog.
Recommended reading list:
++ Some back-story on why credits are NOT included in MRR vs. coupons are included in MRR:
An interesting question that keeps coming up in our debates is, why are discounts included but credits are not included. Credits are generally applied for prorated adjustments of past payments. Say a customer is on a $200 per month plan & decides to downgrade in the middle of the month and a credit of $100 is applied immediately. The credit in this case is based on past payment already made and this credit should not be reduced from MRR.