Metrics are an essential part of managing any startup. They are used to measure and evaluate a startup's performance, growth, and success. Among the most important metrics used by startups is Monthly Recurring Revenue (MRR). MRR is a vital metric for startups with a recurring revenue model.
What is MRR?
Monthly Recurring Revenue (MRR) is a key performance indicator (KPI) used by subscription-based businesses to measure the predictable and recurring revenue generated by their customers each month. It is a crucial metric for businesses that operate on a subscription model, such as Software as a Service (SaaS) companies, as it helps them track their revenue growth and predict future revenue.
MRR is calculated by taking the total revenue generated by all customers in a given month and dividing it by the total number of customers. This gives the average revenue generated per customer in a month. MRR is useful because it provides a more accurate picture of a company's revenue stream than total revenue, which can be impacted by one-time purchases or seasonal fluctuations.
One of the advantages of measuring MRR is that it allows businesses to identify trends and patterns in their revenue growth. For example, if a company's MRR is consistently increasing each month, it is a sign that their customer base is growing and that they are retaining existing customers. On the other hand, if MRR is stagnant or decreasing, it may indicate that the business is losing customers or that their pricing strategy needs to be reevaluated.
Calculating MRR is not always straightforward, as it can be impacted by factors such as customer churn, upgrades, and downgrades. However, there are tools and software available that can help businesses track their MRR and make data-driven decisions to optimize their revenue growth.
Why is MRR important?
One of the primary reasons why MRR is important is that it helps businesses create and maintain a budget. With a clear understanding of their monthly recurring revenue, businesses can allocate funds more effectively, pay for expenses, and plan for the future. MRR also helps businesses to identify trends and patterns in their revenue streams, which can be used to forecast future revenue and make informed decisions about investments and growth strategies.
MRR is also essential for measuring the overall performance of a business. By tracking MRR over time, businesses can get a holistic view of how their subscription-based revenue streams are performing. This allows them to identify areas where they need to improve and make changes to their business strategy to optimize revenue growth. In addition, MRR is a valuable metric for investors who want to assess the long-term viability of a business and its potential for growth.
How to Calculate MRR
Monthly Recurring Revenue (MRR) is a crucial metric for startups to track their revenue growth. MRR is the predictable revenue generated from customers each month. It is important to calculate MRR accurately to understand the revenue trend and make informed decisions. Here are two common methods to calculate MRR:
Method 1: Sum the Monthly Recurring Revenue per Customer
The second method to calculate MRR is to sum the Monthly Recurring Revenue per Customer. To do this, calculate the monthly revenue generated from each customer and then sum all the revenues obtained from customers. For example, if a startup has three customers with monthly recurring revenues of $500, $300, and $200, respectively, the MRR would be $1,000.
Both methods yield the same result, but the second method is useful when a startup has different pricing plans or when the number of customers changes frequently. In this case, the second method helps to track the MRR accurately.
Method 2: Multiply ARPA by Total Number of Customers
The first method to calculate MRR is to multiply the Average Revenue Per Account (ARPA) by the total number of active customers for the given month. The formula is:
MRR = Total Number of Active Accounts x ARPA
ARPA is the average revenue generated per customer per month. To calculate ARPA, divide the total revenue generated in a month by the total number of active customers in that month. For example, if a startup generated $10,000 in revenue in a month and had 100 active customers, the ARPA would be $100.
Limitations of MRR
While MRR is a useful metric for measuring the recurring revenue of a startup, it has its limitations. Here are some of the limitations of MRR:
- Does not account for churn: MRR only takes into account the revenue generated by active customers. It does not account for customers who churned or canceled their subscription. Therefore, a startup may have a high MRR but a high churn rate, which means they are losing customers at a high rate, and their revenue may not be sustainable in the long run.
- Does not account for one-time fees: MRR only takes into account the recurring revenue generated by customers. It does not account for one-time fees, such as setup fees or implementation fees. Therefore, a startup may have a high MRR but a low overall revenue if they rely heavily on one-time fees.
- Does not account for seasonality: MRR is calculated on a monthly basis, which means it may not account for seasonality or fluctuations in revenue that occur throughout the year. For example, a startup that sells products or services that are in high demand during the holiday season may have a high MRR during that time, but a low MRR during other months.
- Does not account for customer acquisition costs: MRR does not take into account the cost of acquiring new customers. Therefore, a startup may have a high MRR but a low profit margin if their customer acquisition costs are high.
While MRR is a useful metric for measuring the recurring revenue of a startup, it should not be the only metric used to evaluate the health and sustainability of a startup. It should be used in conjunction with other metrics to get a more complete picture of a startup's financial health.