Monthly recurring revenue is the income that a business expects to earn every month. It helps you to keep a track of the revenue trends. You can also compare your MRR to monthly account growth rate, customer retention, and monthly sign-ups which can help your sales team to work on areas that need improvement and come up with better strategies.
Formula to calculate MRR
MRR= Average revenue per account X total accounts that month
The average revenue per account can be calculated by taking an average of the amount your customers are paying divided by the total customers. For example, suppose you have 200 customers paying an average of $60 per month, then your monthly recurring expense would be $12000.
Note: Depending on your business, you can also follow the customer-by-customer method. For example, if you had 100 customers that paid you $5 each month, then your MRR would be $500.
Types of MRR
- New MRR- Monthly recurring revenue generated from the new customers is termed as the new MRR. For example, if you get 20 new customers in a month, half of them pay $100 per month and the other half pays $50 per month, then the new MRR would be $1500.
- Expansion MRR- It is the additional monthly recurring revenue that you get from the existing customers. It can happen as a result of your cross-sell or upsell marketing strategies. For instance, In the example above, if ten customers upgrade their plan and pay you $80 instead of $50, then your expansion MRR would be $300.
- If a customer downgrades or cancels a subscription, then this revenue loss is termed as Churn MRR. For example, if five customers cancel their $50 plan, then the Churn MRR would be $250.
- Net new MRR- It is calculated by adding the New and expansion MRR and then subtracting the Churn MRR from it.
Net new MRR= Expansion MRR+ New MRR - Churn MRR
This helps you to calculate how much monthly recurring revenue you are losing or gaining.
Importance of MRR
- MRR helps you to track performance and reflect on your sales and marketing approach.
- With MRR, you can get an idea of how your team is working as a whole. This can help you to make more accurate projections and sales forecasts.
- MRR helps to decide the budget for your business. Having a clear idea about how much revenue will flow into your business, will lead to better decisions related to investments, new hiring, and campaigns.