How to Calculate MRR: Why It Matters and Best Practices
Subscriptions are the bread and butter of any SaaS business. Savvy SaaS businesses regularly track customer retention, churn, and other essential metrics, but monthly recurring revenue (MRR) ties directly to SaaS profitability.
MRR is the amount of predictable revenue a business expects to earn every month from its ongoing monthly subscriptions. Since 40% of organizations have recurring revenue of some kind, MRR is one of the most important metrics you can track in your business.
It’s a powerful metric for understanding cash flow, but many SaaS businesses miscalculate MRR. In fact, 48% of businesses with recurring revenue say they can’t calculate it correctly. Learn why it’s important to calculate monthly recurring revenue and which MRR formula to use for your business.
Why you should calculate monthly recurring revenue
Monthly recurring revenue is a big-picture number that’s very important for your business’s financial health. This sales metric is crucial for diverting your resources to the right places, improving the customer experience, and even securing investor funding.
You need to calculate MRR every month to help your business do the following:
Recurring payments mean it’s easier to forecast revenue. Compare your MRR to your average churn rates so you can project the revenue you expect to earn in a given year or financial period. MRR is a great model to help you understand where your business will be in the future, which is essential for managing cash flow.
Make data-driven decisions
Is it a good time to hire more salespeople or move to a bigger office? MRR helps you make data-driven business decisions based on solid projections. This way, you can route your resources to the most valuable initiatives at any given time.
How is your business performing over time? Learn how to calculate monthly recurring revenue to identify trends over time. Ideally, you want to see MRR trending upwards every month because it’s an indicator of growth. If MRR is trending down, that might mean you need to improve the customer experience or adjust your pricing. But without tracking MRR in the first place, you’ll never know.
Don’t take on more expenses than your business can support. MRR trends will tell you if it’s a bad time to spend money. Take educated risks in your business by managing your cash flow carefully with smarter budgets.
How to calculate monthly recurring revenue
The simplest MRR formula is to add up all of your customers’ monthly subscription fees. This seems simple, but there are a lot of nuances in calculating MRR—the wrong data can muddy your calculations, so you need to use the right inputs and MRR formula to perfect this metric.
Some businesses prefer to use a simplified MRR formula that doesn’t require individually adding up each customer’s monthly subscription. To do this:
- Calculate your average revenue per account, or ARPA. This is the average amount of revenue each account generates.
- Add up your total number of paying subscribers for the month.
- Multiply your ARPA by the total number of accounts. So, if your ARPA is $50 and you have 100 customers, your MRR would be $5,000.
So, instead of calculating the exact amount per customer, you’re averaging the monthly subscription cost. You won’t have a precise number, but this simplified formula is good for streamlining how to calculate MRR.
MRR calculation best practices
1. Include the right data
MRR looks at all of a business’s recurring data. That should include income like:
- Late fees
Don’t forget about customer discounts, too. Many SaaS businesses offer discounted subscriptions for new subscribers. Look at your sales data to confirm how many subscribers are paying a discounted rate and for how long.
It’s helpful to track customer churn here, too. This way, you can anticipate how much MRR you’ll earn in a given month based on how many customers are staying or leaving.
2. Don’t include paid trials
Yes, paid trials are a form of revenue for your business. While you should track trial revenue, it shouldn’t factor into MRR because trial customers aren’t monthly subscribers yet. Many of your trial users won’t convert to a monthly subscription, so it isn’t wise to include their payments for MRR.
3. Calculate annual payments correctly
MRR looks solely at monthly revenue and recurring income. If your subscribers have the option to pay annually, you need to include those payments correctly to calculate an accurate monthly recurring revenue.
Some businesses don’t include annual payments in their MRR calculations at all and calculate it separately as annual recurring revenue (ARR). Others normalize the annual payments into a monthly average. For example, if a customer pays $1,200 in January for a year of service, it translates into $100 per month of MRR.
Calculate monthly recurring revenue for SaaS
Your business needs regular income to support operations and stay profitable over time. Monthly recurring revenue is a valuable metric that helps you plan your momentum correctly, investing your resources wisely for sustainable growth.
But subscription revenue is just the tip of the iceberg. When you need to do more with less, go with a smart automation solution like Goolash. Test drive our solution with a free 30-day trial.