Your SaaS business lives and dies by consistent subscription revenue. To measure that growth or decline, you’re ultimately focused on the almighty MRR or “Monthly Recurring Revenue” metric.
Yet, in speaking with 50 SaaS companies to put this post together, we found that calculating this somewhat simple metric accurately was an absolute disaster. 1 in 5 SaaS companies were removing some sort of expense from the equation; 2 in 5 were including trialing or free users in some manner; and a majority were incorrectly breaking down their annual or quarterly payments.
Although MRR isn’t part of GAAP (Generally Accepted Accounting Principles), IFRS (International Financial Reporting Standards), or reported to a government entity, not having these numbers correctly calculated means you’re lying to investors or worse - you’re setting yourself up for a potential rude awakening when you’ve realized you've misjudged and misplanned your momentum.
“Incorrectly calculating MRR means you're lying to investors or worse - misjudging your growth and momentum.Lesson 2 from @HubSpot's pricing: Your buyer personas are central to pricing success”
Let’s avoid these mistakes by quickly going through what MRR is and why it’s important to your business, before going through how to calculate MRR, the mistakes to avoid, and one key way you can easily and clearly keep yourself on track.
What is MRR (monthly recurring revenue)?
MRR stands for Monthly Recurring Revenue, which measures the total amount of predictable revenue that a company expects on a monthly basis. MRR an important figure for tracking monthly revenue figures and understand the month-to-month differences in your subscription service.
Why tracking MRR is important
Successful SaaS companies track their MRR for two primary reasons:
Financial Forecasting and Planning
In Saas you’re able to make accurate financial projections because of the subscriptions, and a large part of that is because MRR is relatively consistent and predictable. As you gain subsequent months of consistent revenue you can begin to model estimates of where you’ll be and then can plan your business accordingly.
Measuring growth and momentum
If you’re on the investor backed or take over the world track, the growth in your MRR on a month over month time period is absolutely critical. MRR is a key indicator of the growth of a SaaS business and the month over month growth percentages will clearly indicate whether you’re on a rocket ship or you’re still on the launchpad fueling. (We give some great advice on improving your MRR growth here)
How to Calculate MRR?
Calculating your MRR might seem like a daunting task, but we’ve broken it down for you into four short steps.
To calculate MRR:
- Align your data
- Sum up MRR
- Breakdown by cohort
- Calculate MRR growth
Align your data
Take all of the customers from a given month and put them in a spreadsheet with a column for their account ID (or some other unique identifier). In the next column put their subscription value, taking any multi-month subscriptions and dividing the contract value by the number of months.
Sum up MRR
Next, just sum the subscription column. This figure will be that month’s total MRR.
Breakdown by cohort
The top level information is great, but you’ll also want to break things down by type of pricing plans, cohorts, etc. Just follow the same process as above, but only include data from the segments that you're interested in.
Calculate MRR growth
Once you know your MRR you’ll want to know your MRR growth as well. You can do this by breaking down the above sections into cohorts like “New MRR”, “MRR from Add-ons”, or “Churn MRR”. To get your total growth MRR, you’ll do this calculation: (New MRR + Add-on MRR) - Churn MRR = growth MRR.
The steps above are probably a little abstract to you at the moment, so let me give you a more concrete example. If you have 10 customers in your Basic plan at $10 per month, and 10 customers in your Pro plan at $15 per month, your total MRR would be (10 x $10) + (10 x $15) = $250.
Admittedly, this can and should get much more complicated as you start to dig into your metrics more. You’ll want to measure your expansion MRR (upgrades), customer churn, downgrades, new, etc. all in one graph like the one below:
Yet, the larger point here is that MRR, especially on the top-level is purely your actual subscription value and your number of customers. Keep in mind that all of this commentary is referring to months that have already happened. When you’re cooking with gas you’ll want an update day by day tracking your MRR, which becomes more of an issue when you’re caring about the MRR breakdown (churn, upgrades, downgrades, new, existing). We’ll save that commentary for another post.
Why should you calculate and optimize MRR?
Calculating MRR will help you understand the health of your company, set goals for the future, and determine how you'll reach those goals. Understanding MRR is important because it gives you insights into:
- Post Product-Market Fit Compass Metric: After finding the initial product-market fit through user testing and activity, you can measure MRR as the main compass metric to track growth within a SaaS organization. This is because MRR is the purest measure of your revenue in a SaaS business, indicating how your revenue building or waning over time.
- Product team: Building a better product will help you retain customers, which will prevent MRR loss. Every month your team should be incentivised by MRR to develop features and experiences to prevent MRR Churn.
- Sales team: Your sales team can improve MRR by making deals with more qualified leads and emphasizing the quality of leads over quantity. Your sales and marketing teams typically will primarily be focused on net new MRR.
- Critical financial metric: MRR is a crucial financial metric—it gives you the most accurate status check up of your SaaS company. It explicitly accounts for the "recurring" components in your subscription model and for those same components on a yearly scale using ARR.
Common mistakes when calculating MMR
MRR is a huge metric for subscription businesses, so you'll need to be wary of some common mistakes when calculating it.
Mistake 1: Including quarterly, semi-annual, or annual contracts at full value in a single month
Even if someone pays you all the money up front, their subscription value in MRR calculations should be divided by the intended subscription length. The reason for this goes back to one of the main uses of MRR - momentum measurement. You’re not trying to measure cash flow. You’re trying to measure how quickly and efficiently you’re growing. Including everything at once throws off many of your other metrics, including customer churn, customer count, etc.
The one place you would count all of the cash is in your bookings calculations.
Mistake 2: Subtracting transaction fees and delinquent charges
It can be tempting for founders to subtract transaction fees and delinquent charges from their MRR totals in an effort to be more conservative and accurate when calculating their metrics. While the intentions here are good, the end results are unfortunately incorrect and misleading.
Delinquent charges are in a gray area between churn and active, especially if you typically quickly recover any failed credit card charges. The problem here though is in an end of month (EOM) calculation schema a delinquent charge is technically gone because you didn’t collect the subscription from the customer. What you should instead do with your delinquent charges is to separate them out into their own category. This type of grouping allows you to accurately measure and decrease the amount of lost revenue each month due to failed or expired credit cards.
Additionally, including transaction fees doesn’t give you enough credit and hides a potential room for optimization. Sure, you’ll never get that transaction fee to 0%, but you can easily switch billing systems, spin up your own solution, etc to optimize costs. A great concept to keep in mind is that any expense that can be optimized should be labeled as an expense and not immediately taken out of your MRR. With that logic, you should theoretically take out all of your customer acquisition cost (CAC).
Mistake 3: Including one-time payments
Essentially, these aren’t “recurring”, so they don’t belong in Monthly “Recurring” Revenue. You don’t expect to receive them on a regular basis, which means that including them in your MRR calculations will inflate your revenue expectations and skew your financial model.
Mistake 4: Including Trialers in Their Calculations
Perhaps the most egregious SaaS sin is including trialers and their expected subscription value before they actually convert to being a customer. Doing this essentially gives you a consistently high list of “net new” customers and “churned” customers because we all know 100% of trialers don’t convert.
Mistake 5: Not Including Discounts
Another egregious and misleading error is not including discounts in calculations. If you give someone a discount on a $100/month plan so they’re paying $50/month, your MRR isn’t $100/month; it’s $50/month. Eventually if you took the discount away, your top-level MRR would jump by $50/month.
Top ways to improve your MRR
Improving your MRR isn’t easy, but it’s worth the effort. Here are two things you can do right now to improve your MRR.
1. Make sure you’re calculating (or your software) is calculating things correctly
As mentioned in the first few paragraphs - many companies are calculating things incorrectly and these aren’t just new kids on the block, we’re talking some companies that’ve closed C rounds or are of that size.
Additionally, a study of the billing platforms that include these analytics (Recurrly, Zuora, etc) and of some tools that integrate with billing platforms, revealed numerous of the mistakes above.
2. Goal Setting for your MRR - The Waterfall Chart
Remember, one of the biggest takeaways is that MRR is a momentum metric. The best way to track that momentum is through a waterfall chart, which shows the relationship between your cumulative MRR and the days of the month. The chart should plot: the growth rate in your MRR from last month, the growth in your MRR for the current month, and your month over month goal for MRR growth for the current month. See the image below for an example:
Once you have this in play, you should check in on your waterfall chart each day to ensure that you’re on track to reach your goals. You probably won’t care as much in the beginning of the month, but as the end of the month approaches you’ll start kicking yourself or your sales team into gear (hopefully sooner by visualizing your progress). Checking your MRR consistently and acting upon it can lead to a larger customer base, a better chance to reduce churn, and an increase in sales revenue.
To sum it up:
There’s so much more to explore and discuss concerning MRR and subscription business metrics, we’ll be sure to bring you more and more as the weeks and months move on, but remember that in this game we call SaaS momentum and subscription is the supreme focus.
In the meantime check out our free SaaS tool for Stripe that builds out your waterfall above. Go get your SaaS in gear.