Monthly Recurring Revenue, or MRR, is a monthly amount of revenue secured by a business on an ongoing basis. It is one of the main metrics for a subscription-based business model, where customers pay fees every month, in exchange for services or products.
Recurring revenue is preferred because it scales over time. As a business increases its customer base, the monthly revenue also goes up – unlike one-time sales, which need to be maintained every month for revenue targets to be met.
The most common examples of monthly recurring revenue for companies include Netflix subscriptions (where customers pay Netflix fees every month), web hosting services, and cellular service contracts.
However, the types of recurring revenue vary for different businesses, and we will go over the main considerations in this post.
Types of Monthly Recurring Revenue
As mentioned earlier, there are different recurring revenue business models. One of the most common is a contract-based model, where, for instance, cell phone companies, require customers to sign multi-year agreements. Such monthly recurring revenue is the most stable and reliable, since each customer is contract-bound to make the subscription payments each month.
Then we have simple monthly subscriptions for SaaS (software as a service) businesses, which do not have any minimum time commitments, but are renewed automatically. The same goes for most content delivery services, such as Netflix, which have automatic renewals every month, until customers cancel their subscriptions. While such monthly recurring revenue is less reliable than the revenue backed by contracts, it does drive quality of service and innovation since companies compete for customer retention.
Ecosystem Recurring Revenue
This is a type of recurring revenue which is often realized in the long term and is harder to calculate. For this you can look at companies like Apple, which develop ecosystems and platforms, which further promote the sales of smaller accessories or items which are purchased by customers on a fairly regular basis.
For instance, Apple customers are very likely to continue buying original Apple charging cables, docks and other accessories, as long as they remain in the ecosystem.
How to Calculate Your Monthly Recurring Revenue?
Monthly recurring revenue calculation is easy for simple, contract-bound or automatically renewing subscriptions. You just have to multiply the number of customers with their monthly commitments and add the figures to reach a total.
For example, if your subscription business has 10 customers, 5 of whom are subscribed to Package A ($25/month) and 5 are subscribed to Package B ($30/month), your total MRR will be:
($25×5) + ($30×5) = $125 + $150 = $275
When it comes to more complicated models, such as the ecosystem recurring revenue, you could calculate MRR using the average revenue per user (ARPU).
For example, if your customer base includes 1,000 users, and the average revenue per user is $50, your MRR will be:
$50 x 1000 = $50,000
In certain cases, a business may offer yearly subscriptions for a discount. In these instances, calculating monthly recurring revenue requires normalization, where the yearly revenue per customer is divided by 12 to reach a monthly number.
For example, if a business has 10 users on a yearly plan costing $360 and 10 users on a monthly subscription of $40/month, the MRR would be:
(10 x $360)/12 + (10 x $40) = $300 + $400 = $700
Calculating Monthly Recurring Revenue Growth
This is another important metric, allowing business owners to understand how their MRR is growing every month. In order to calculate MRR Growth however, you will need to calculate other figures, including New MRR, Expansion MRR and Churn MRR.
New Monthly Recurring Revenue
This figure denotes the new monthly recurring revenue added to your account from new customer acquisition. For example, if your business managed to secure 5 new customers this month with a monthly subscription plan of $10, your new MRR will be (5 x $10) = $50.
Expansion Monthly Recurring Revenue
In contrast to new MRR, the expansion MRR denotes the increase in revenue due to existing customers upgrading their packages or buying additional services. For instance, if in a month, 5 customers upgrade from $10 to $20 plans, your expansion MRR will be (5 x $10) = $50.
Churn Monthly Recurring Revenue
Churn MRR denotes the recurring revenue lost due to subscription cancellations and downgrades. For example, if 3 of your customers cancelled their $10 subscriptions and 2 of them downgraded from $20 to $10 packages, your churn MRR would be (3 x $10) + (2 x $10) = $50.
Monthly Recurring Revenue Growth
After calculating the figures above, you can work out your monthly recurring revenue growth as under:
MRR Growth = (New MRR + Expansion MRR) – Churn MRR
Using figures above, our MRR Growth would be = ($50 + $50) – $50 = $50
The Move Towards Recurring Revenue
Within the last few years, several businesses have changed their revenue models to include subscriptions and licenses, which allow for sustained growth and facilitate further research and development, innovation and expansion.
Forward-thinking companies such as Adobe, started moving towards subscription models soon after they realized how consumer behaviors changed and how people generally opened up to the idea of continually paying for high-quality services/products.
Same is the case with Netflix, which has taken a very aggressive stance towards expansion and is investing considerable resources to grow their user-base today, in a bid to profit from it in the long-term.
As a business in the digital age, it is imperative that you evaluate your revenue model. If you’re already going for recurring revenue, now is a great time to lay down the foundation for the proper management of your MRR.
Managing your Monthly Recurring Revenue
Recurring revenue is key to growth and scalability, but like any other financial aspect of your business, it needs proper management, recording and reporting. As your business increases its customer base you will need more sophisticated measurement systems for both accounting and managerial purposes.
At Park City Bookkeepers, we have considerable expertise helping both online and offline businesses manage their monthly recurring revenue calculations regardless of how complicated they are. You can view more about our business management consulting services and we can help you make sense of your needs and the solutions we can provide.