Wall Street Prep

Monthly Recurring Revenue (MRR)

Guide to Understanding Monthly Recurring Revenue (MRR)

Learn Online Now

Monthly Recurring Revenue (MRR)

In This Article
  • What does the monthly recurring revenue (MRR) measure?
  • What is the monthly recurring revenue (MRR) formula?
  • How is the monthly recurring revenue (MRR) different from annual recurring revenue (ARR)?
  • What are some examples of expansion monthly recurring revenue (MRR)?

How to Calculate Monthly Recurring Revenue (MRR)

MRR stands for “Monthly Recurring Revenue” and refers to the proportion of a company’s revenue that is stable and predictable from subscription-based pricing, expressed on a monthly basis.

The MRR is the amount of subscription-based revenue SaaS companies can anticipate receiving each month from their active accounts, i.e. the monetizable user base.

When evaluating the growth profile and financial health of SaaS and subscription-based companies, MRR is a particularly meaningful KPI to track.

Calculating MRR provides a more detailed understanding of the stability of a company’s future revenue and user trajectory and helps shape forecasts.

By analyzing historical trends, a company’s weak points can be identified in order for management to make adjustments appropriately to support future growth.

Importance of Calculating MRR in SaaS Industry

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.
B2B vs. B2C User Retention

For both B2B and B2C companies, user retention results from reducing the churn rate.

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.

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.

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).

Monthly Recurring Revenue (MRR) Formula

The average revenue per account (ARPA) is commonly used in the MRR calculation – or as an alternative, the average revenue per user (ARPU) could also be used.

Conceptually, ARPA and ARPU are identical in representing the average amount billed to a customer – and for either metric, the formula divides total recurring revenue by the total number of accounts (or users).

  • Average Revenue Per Account (ARPA) = Total Recurring Revenue ÷ Total Active Accounts
  • Average Revenue Per User (ARPU) = Total Recurring Revenue ÷ Total Active Users

It is important to ensure that only “recurring” revenue is used, NOT total revenue, which can include one-time fees – further, only “active” (paying) accounts must be included, NOT those that signed up for free trials.

In order to calculate MRR, the average revenue per account (ARPA) is multiplied by the total number of customers for the given month.

MRR Formula
  • MRR = Total Number of Active Accounts x Average Revenue Per Account (ARPA)

Each metric must also be normalized to be shown on a per-month basis.

  • Quarterly Contract → Divide by 4
  • Semi-Annual → Divide by 6
  • Annual → Divide by 12

For instance, suppose a B2B software company’s products are offered on a subscription basis and paid annually at a cost of $24,000 per user.

The $24,000 must be divided by 12 to calculate a monthly revenue of $2,000, which would be used in the MRR calculation, as opposed to the annual cost of $24,000.

  • Normalized Total Monthly Revenue = $24,000 ÷ 12 = $2,000

Next, let’s assume the company has 50 active accounts for the given month.

Upon multiplying the total number of active accounts by the average monthly revenue per user, the resulting MRR is $100,000.

  • MRR = 50 x $2,000 = $100,000
Mistakes in Calculating MRR

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 Formula
  • Net New MRR = New MRR + New MRR Expansion − MRR Churn

MRR vs. ARR

If MRR is annualized, then the resulting figure is annual recurring revenue (ARR).

Annual Recurring Revenue (ARR) Formula
  • 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).

Monthly Recurring Revenue (MRR) Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

dl
Submitting ...

Monthly Recurring Revenue (MRR) Example Calculation

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

Monthly Recurring Revenue (MRR) Calculator

Step-by-Step Online Course

Everything You Need To Master Financial Modeling

Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks.

Enroll Today
Comments
guest
0 Comments
Inline Feedbacks
View all comments
Learn Financial Modeling Online

Everything you need to master financial and valuation modeling: 3-Statement Modeling, DCF, Comps, M&A and LBO.

Learn More
X

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.