Treatment of One-Time Fees in Calculation
The most common mistake when calculating MRR is forgetting to remove one-time payments.
Unlike subscription-based payments, one-time payments are not recurring and should not be included in the MRR calculation.
Examples of one-time payments include:
- Professional Service Fees
- Consulting Fees
- Installation Fees
- Set-Up Costs
Net New MRR Formula
The “Net New MRR” is used to adjust the prior month’s MRR for new MRR, expansion MRR, and churned MRR, i.e. it is inclusive of both gains and losses.
- New MRR = Incremental MRR from New Customers
- Expansion MRR = Additional MRR from Existing Customers (e.g. Upgrades, Upselling, Cross-Selling)
- Churned MRR = Lost MRR from Cancellations or Downgrades
Net new MRR is calculated by taking the new MRR from new customers acquisitions, adding expansion MRR from existing customers, and deducting the lost MRR from churned customers.
After adjusting the beginning MRR for the net new MRR, the resulting amount is the “Net MRR”.
Net New MRR = New MRR + New MRR Expansion − MRR Churn
MRR vs. ARR: SaaS Business Recurring Revenue Analysis
If MRR is annualized, then the resulting figure is annual recurring revenue (ARR).
Annual Recurring Revenue (ARR) = MRR × 12
MRR measures the recurring revenue brought in each month, whereas ARR measures the recurring revenue generated over the course of a full year.
ARR is used to estimate revenue for the upcoming year, based on the most recent MRR, assuming that the given month is the most accurate indicator of future performance.
The drawback to ARR is the implicit assumption that there are no changes to your customer base during the course of the year (i.e. no customer churn, upselling, or downgrades).
How to Interpret MRR in SaaS Industry (High vs. Low)
Perhaps the most essential KPI for SaaS companies, the monthly recurring revenue (MRR) determines a company’s long-term viability.
Top SaaS companies are usually not only effective at acquiring new customers but can also retain them for a long period of time, i.e. have a low churn rate.
If customer payments are recurring – i.e. consistently occurring and on a contractual basis for an agreed-upon time frame – the company’s future performance is more predictable, which in turn, reduces its risk.
A higher percentage of recurring revenue enables companies to raise capital more easily and at more favorable terms from institutional venture capital (VC) and growth equity firms.
- High % Recurring: The greater the proportion of revenue of a company that is of a recurring nature, the easier it is to forecast future performance, particularly if the company has a strong grasp of its new customer acquisition strategies and methods to reduce churn.
- Low % Recurring: On the other hand, underperformance in MRR growth can bring attention to weak points that are contributing to high churn rates from existing users, such as an ineffective sales & marketing strategy or inadequate pricing plans.
User Retention Analysis: B2B vs. B2C Churn Rate (%)
The business model of SaaS companies is based on monthly subscriptions, in which customers pay a predetermined amount each month, for as long as they remain a customer.
For both B2B and B2C companies, user retention results from reducing the churn rate, i.e. strong growth in new customer acquisitions with limited customer attrition.
- B2B Business Model: Specific to B2B companies, however, is that retention also results from long-term multi-year customer contracts, i.e. a contractual agreement to continue doing business together.
- B2C Business Model: Since most B2C products are sold on a monthly basis (e.g. Spotify), the churn rate tends to be higher than for B2B businesses (who lock their customers into multi-year contracts).
MRR Calculator – Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Monthly Recurring Revenue Calculation Example
Suppose we’re projecting the monthly recurring revenue (MRR) of a SaaS company with 1,000 active accounts at the beginning of January 2022.
At the end of each month, the active accounts must issue a payment to the provider at the agreed-upon amount to continue receiving the services; otherwise, their access will be lost.
Therefore, the MRR that we are calculating is the projected MRR as of the end of the month, instead of at the beginning of the month.
Using the monthly churn rate assumption of 2% and the new account acquisition rate of 4%, the ending number of active accounts can be calculated for each month.
- Churn Rate = 2%
- Acquisition Rate = 4%
From January to April, the ending number of active accounts – the number of monetizable customers – increases from 1,020 to 1,082.
- Jan = 1,000 – 20 + 40 = 1,020
- Feb = 1,020 – 20 + 41 = 1,040
- March = 1,040 – 21 + 42 = 1,061
- April = 1,061 – 21 + 42 = 1,082
The next step is to figure out the average revenue per account (ARPA), which is the monthly billing amount per customer.
We’ll assume the monthly billing is $200 per account.
- Average Revenue Per Account (ARPA) = $200
For each month, the monthly recurring revenue is equal to the ending active accounts multiplied by the ARPA.
- MRR = Ending Number of Active Accounts × ARPA
Our illustrative company’s projected end-of-month MRR from January to April is shown below.
- January = 1,020 × $200 = $204,000
- Feb = 1,040 × $200 = $208,080
- March = 1,061 × $200 = $212,242
- April = 1,082 × $200 = $216,486
