What is MRR? How to Calculate Monthly Recurring Revenue?
In any business, keeping track of performance is imperative. There are several essential metrics for subscription-based businesses that you need to know and understand if you are planning a new business or expanding an existing one.
Today we’re going to dive deeper into one metric that often makes the subscription model so appealing – Monthly Recurring Revenue (MRR). This metric is considered as one of the key metrics for subscription-based businesses, as it helps measure the overall company’s performance. By looking at MRR you can determine whether your business is actually growing, plan your future initiatives, and forecast further development opportunities. Investors usually look at MRR when evaluating your product’s potential.
What is MRR
Let’s start by defining MRR. Monthly Recurring Revenue (MRR) is the amount of money you expect to bring in every month from your recurring subscriptions. It includes all the recurring charges from discounts, coupons, and add-ons, but excludes one-time fees.
For example, let’s say that you have a subscription app. A customer chooses a yearly subscription and pays an annual subscription fee to use your app. The client agreed to pay $120 per year, and therefore you can expect that your monthly revenue to be $10. That is your app’s MRR.
When you know exactly how much revenue you generate each month, it’s easier to record and track revenue trends over time. Identifying such trends is especially important if you offer your customers subscriptions that have different durations, like both monthly and annual subscription options.
Regardless of subscription duration, Apple and Google pays out the full subscription price to a developer in the nearest developer payment cycle. If it’s a long-term subscription, this can cause a spike in revenue, and you can miss important trends caused by shorter-term or lower-price products. MRR serves here as a generalized filter that helps clarify actual revenue trends.
Let’s look at the following example:
- Monthly plan at $50/month for plan A
- Annual plan at $200/year for plan B
Let’s assume that you have 10 customers on plan A and 1 customer on plan B, all subscribed in the current month. In that first month your total revenue is $700, and you are getting $700 in payments from app stores (before accounting for taxes and app stores commission).
There is no payment in the following month from the customer with an annual plan. So, the second month payments from the stores to you will amount to $500.
But this doesn’t mean that your recurring revenue is decreasing; the number of customers is stable and your actual revenue has not changed.
Therefore, the total monthly revenue without considering subscription duration doesn’t provide you with a true picture of the health of your subscription business.
MRR also serves as a benchmark for the size and growth of your subscriber base when you can compare it to data such as monthly growth, monthly sign-up rate for subscription service offered or even with retention rates.
Why you need to calculate MRR
Here are several more reasons why you need to calculate monthly recurring revenue:
It allows you to track the performance of your business
MRR helps you to keep track of the monthly trends and provides you with insights of your business. It shows you whether your growth is positive or negative over months. If it’s positive, it means that more people are willing to pay for your services. If it’s flat for some period of time then you need to consider changing something, as you’re probably hitting the wall. If it’s negative, then it means that your churn is outpassing user acquisition, which a bad sign for your business’s health.
You can forecast revenue and build financial models
The more consistent your monthly revenue is, the easier it is to forecast where your business will be in the future. This is valuable, since it allows you to make strategic decisions based on this forecasting. Whether you’re trying to raise funds, put together a hiring plan, or just planning for the future of your company, this data is invaluable.
For example, let’s say your current MRR is $100K with average growth of 5% per month. With this data you can now forecast how much revenue your business will generate in 3 or 9 months, and you can create upside and downside scenarios to compare.
In terms of finance, MRR is also an important component for major calculations and metrics. For example, it is used to:
- Report on growth from new contracts (including those with different term lengths)
- Report on net gross expansion and contraction from existing customers
- Assess trends in average selling price (ASP)
- Calculate Customer Lifetime Value
- Report on MRR Cohorts (by customer start month, quarter, or year)
- Estimate or project future revenue
Therefore, this metric is essential to your product growth as it measures your current performance, helps you to forecast future performance, and will help you make relevant and informed decisions.
How to calculate MRR
There is no particular standard for calculating MRR, so different businesses compute it differently. However, there are 3 things that you need to consider when calculating Monthly Recurring Revenue:
- The computation shouldn’t depend on the month of a year despite a different number of days in different months. The duration of “one month” should be standardized.
- MRR calculation includes all recurring plans and recurring add-ons after discounts
- MRR calculation doesn’t include nonrecurring fees including: setup fees, non-recurring add-ons, credit adjustments, any one-time purchases and non-recurring ad hoc charges.
The simplest way to calculate MRR is to sum up all the money received from your paid subscriptions/customers.
MRR = Sum (Monthly Recurring Charge of all paying customers)
MRR can also be calculated using the monthly ARPU (Average Revenue Per User). Monthly ARPU is the average amount of money that your business received from each of your customers in a given month. Check out this article to find out more about how to calculate ARPU.
If you know your monthly ARPU, then you can calculate MRR:
MRR = ARPPU * Number of active subscribers
For example: you’ve launched a new app with a monthly subscription fee of $15 per month and you now have 100 customers. That means your MRR is $1500.
Let’s look how to calculate MRR in another example:
Assume that your product has a monthly subscription plan that costs $200 per month.
It also has a recurring add-on of $100 per month and non-recurring add-on of $100. Moreover, you offer discount coupons for $25 per month. What is the Monthly Recurring Revenue for this product?
Here is how that can be calculated for one customer:
(Plan price $200) + (recurring add-on $100) – (Discount $25) = $275 in MRR.
You see that the invoice amount here is $375, but MRR equals $275. As we stated previously, it is important to consider that non-recurring add-ons are not included into the calculations. And if you want to calculate the overall MRR, you need to sum up all the individual MRR’s.
Types of MRR
We’ve covered how to calculate MRR and now can proceed with a more in-depth look into MRR.
While you are growing your business you probably want to have a more precise and detailed view of what factors influenced the change in your MRR over the previous month. Breaking MRR down further will help you see revenue trends and growth areas.
New MRR
New MRR measures monthly recurring revenue from only new customers for a particular month. The calculations stay the same: if you acquired 10 new customers that pay $50 per month and 4 new customers that pay $150 per month then your new MRR will be:
(10 customers x $50) + (4 customers x $150) = $1100
Expansion MRR
Expansion MRR represents additional revenue that you receive only from existing customers over a month compared to previous month. This revenue may be generated when a customer:
- Upgrades his subscription plan to high-priced or from trial plan to a priced plan,
- Purchase recurring add-ons or one-time add-on,
- Decide to reactivate a canceled subscription
For example, one of your customers decided to upgrade their subscription plan from $50 to $100 and another decided to transfer from the trial to the $50 plan. In this case, your expansion MRR will be:
($100 – $50) + $50 = $100
Churn MRR
Churn MRR shows you how much revenue you lost due to cancellations. High-churn MRR signals that your product is not relevant to your customers.
For example, if two of your customers who were subscribed to a $50 plan canceled their subscriptions, then your Churn MRR will be
-$50 * 2 customers = -$150
Note that Churn MRR is written with a minus, so it means that you’ll have minus $150 on your recurring revenue for next month.
Net New MRR
All three types of MRR listed above are used to calculate Net New MRR. Net New MRR helps you to determine how much MRR you gain or lose. If the sum of New MRR and Expansion MRR is more than Churn MRR, then congrats – you’ve made money!
Net New MRR = New MRR + Expansion MRR – Churned MRR
These four components are the key foundation metrics for any subscription business, and you need to track them reliably and regularly.
The red line represents the sum of all other components. The goal here is to see that the red line is growing. Other components indicate why it isn’t growing, what may be contributing to its growth, and what you can do better. It is clear that, in order to see whether net new MRR is growing, you need to have it as a time series.
How to track MRR
MRR is a vital metric for your subscription-based business. Although it may seem straightforward, it has many nuances that are important to know and track, because they bear implications for your business growth. Tracking MRR on a daily basis gives you an advantage to act immediately after a bad month or quarter. It’s also valuable to see how each adjustment, such as services promotion, sales contests, and promotions, impacts the MRR chart. Therefore, you can understand how it influences the business growth.
While generating an MRR report, you need to have data about transactions, their prices, durations, purchase dates, and expirations. Apple or Google reports allow you to see information about your MRR, but there you can find only basic data that will give you a quick overview of your business growth. For example, Google and Apple reports don’t provide you with information about the exact expiration dates, so it may lead to errors based on the calendar date. If you want to have more in-depth data, then you need to use third-party analytic tools that give you real-time computation of MRR and allow you to check other MRR types and implement different segmentation. For example, Qonversion can provide you with a number of critical subscription performance reports such as MRR and MRR Movement.
But it’s not enough to track only one metric to ensure stable and profitable growth. You need to track other key metrics for subscription apps such as DAU, MAU, number of subscribers, Lifetime Value (LTV), Retention Rate, Churn rate, Cost Per Acquisition (CPA), and more. All of these can be viewed in Qonversion’s easy-to-use dashboard, so you can have them all in one place. Qonversion’s real-time dashboards can help you make accurate strategic decisions to power up your marketing or growth campaigns.
With the multiple integrations, Qonversion can send valuable subscription data to other analytics platforms. It means that you will be able to have all relevant data about your business without worrying that you’ll miss valuable insights.
Tips to improve your MRR
The key to steady and sustainable growth is to focus on creating more recurring revenue. In other words, you should put your energy into increasing monthly recurring income (MRR), rather than focusing all your efforts on acquiring new customers. You can achieve this in part by focusing on customer retention, limiting churn, and customer loyalty, so that you will be able to accelerate your growth. Implementing these strategies can be a vital asset to your business.
Utilize customer feedback
Listening to your users in order to understand their needs and desires is an essential part of your product development. Users won’t use your product if they don’t need it.
A study from Wompy also revealed that businesses which respond to reviews have on average 35% more revenue, and that businesses with more reviews across sites generate 54% more revenue. Therefore, listening to your customers and providing excellent customer service may increase your revenue, lower your acquisition costs, and boost your conversion rates.
Have a strong value proposition
Again, if your users don’t know what exactly you want to offer them, they will churn. Try to show your customers why they need to choose you, what you can do and others can’t, and explain how your product may solve their pain points. To represent the full value of your product you can offer a limited-time trial with the full benefits of your app. This way customers will likely take up a full subscription.
Use social media
Social media is a great marketing tool for more than just user acquisition. You can describe your product to desired target audience, attract new customers, form a community, acquire brand advocates, and speak to your customers as a brand. Utilizing social media can help you build a relationship with your customers and increase loyalty.
Increase your product prices
If you want to boost your MRR, an increase in prices is the easiest way to do it. Try to slightly increase your prices and see how your customers react. But here you may face the problem of rejection and abandonment. To avoid this, you need to have a strong value proposition so your customers will know your worth. You may also offer prospective customers multi-tiered pricing options. This way they can adjust to changes independently. Once small increases like this stop improving your MRR, then you may need to leave your price as is and try to do it later.
Upsell and upgrade
It is a well-known fact that acquiring new customers is more expensive than retaining existing ones. If your customer base is growing, is loyal, and is getting more value from your businesses over time then you have formed a trusting relationship. This is an opportunity to offer them an upgrade. You can approach it in the form of offering recurring add-ons, premium support of premium plans.
Monthly recurring revenue (MRR) is a key business metric for subscription-based businesses. MRR makes long-term revenue forecasts based on a company’s current recurring revenue and offer an idea about how the business will grow. MRR can be used to convince potential investors.
Track the MRR of a subscription app with Qonversion
Qonverison calculates the MRR for your app automatically, regardless of whether you offer weekly, monthly, or annual subscriptions. You can integrate Qonversion’s analytics mode in just 20 minutes to get the best-in-class mobile subscription analytics with metrics including active subscribers, MRR, conversion rates, cohort analysis, and many more. Qonversion supports both App Store and Google Play, plus you can even send your Stripe subscriptions data to Qonversion.
We hope that you found this article useful. If you have any questions or ideas about Monthly Recurring Revenue or other important metrics for subscription apps, feel free to reach out to us.