How to Calculate MRR for SaaS in 6 Steps

By Patrick Campbell
Summary

How to calculate MRR

  1. Start with MRR at the beginning of the month
  2. Add MRR gained from new customers
  3. Add MRR changed from customers upgrading
  4. Subtract MRR change from customers downgrading 
  5. Subtract MRR chum for the month
  6. Exclude setup fees, credit adjustments, & one-time payments

Deeper insights into calculating and optimizing MRR/ARR for SaaS

What to include when calculating MRR/ARR:

MRR/ARR is the sum of all subscription revenues that came into your business within a given period. Here are the items that you should include in your MRR/ARR calculations:

  1. All recurring elements: This will include any elements of your subscription model that are recurring. For example, any monthly fees or other recurring charges such as per user/seat, per visit, etc.
  2. Account upgrades: Capture the upgrade dollars from current customers who have expanded their use of your product, especially those who have moved up to a higher level plan or who have expanded their use of your value metric.
  3. Account downgrades: This includes the total dollar amount of customers that have downgraded their service. This is important because downgrades represent money lost from current customers that have not churned.
  4. Lost MRR from churned customers: This component is tallying the MRR/ARR that you lost from customers who actually churned, not those who've cancelled.

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mrr_image.png

Goal Setting for your MRR - The Waterfall Chart | The chart should plot: the growth 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.

 

Example

6 Steps to Calculating MRR

True MRR can be calculated by following these steps:

  1. Start with MRR at the beginning of the month
  2. Add MRR gained from new customers for the month
  3. Add MRR change from customers upgrading for the month
  4. Subtract MRR change from customers downgrading for the month
  5. Subtract MRR chum for the month
  6. Make sure to exclude setup fees, credit adjustments, & one-time payments

What you Should Not Include when determining MRR/ARR

he key to getting accurate MRR/ARR metrics is to understand that it is a tabulation of ONLY the recurring aspects of your subscription model along with subtracting downgrades and MRR Churn. It can be really easy to let some “non-recurring” items slip into your calculation.

Additionally, you need to understand that MRR/ARR is a "momentum metric" that should be held as pure as possible. One of the biggest ways to flub this up is to include things like recurring costs or forget to subtract discounts. You want to make sure you stay on one side of the income statement while also being completely transparent about the money you're actually bringing in before expenses. For a larger list of all the items companies are incorrectly excluding or including in MRR, check out this blog post: You're probably calculating MRR incorrectly. Here's Why.

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Patrick Campbell

Patrick Campbell

Founder & CEO, ProfitWell

Find Patrick Campbell on twitter or linkedin

  
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