How to calculate and improve monthly recurring revenue (MRR)

Monthly recurring revenue (MRR) is one of the key metrics that eCommerce, software as a service (SaaS) and subscription-based businesses use to measure success. 

But what exactly is it, and why is it important? We’ll explore both questions, explain the eight types of MRR and discuss why you should track them.

What is monthly recurring revenue (MRR)?

Monthly recurring revenue is the income that a business can rely on gaining over one month. It represents stable, regular, and predictable earnings. 

MRR is a method of averaging your pricing plans (variable or not) and billing periods so that you have a consistent number to track over time. When you track it, you can discover trends and learn where and how your business can improve financially.

Your MRR creates a correlation between customers and their accounts, and it can even shed light on their subscription behaviour.

For example, a rise in MRR indicates you’re gaining more customers, subscription plan upgrades, or perhaps both. Alternatively, a fall in MRR indicates subscription cancellations, downgrades, and churn. 

[Related: How to calculate cash burn rate the right way!]

How to calculate monthly recurring revenue (MRR)

You use MRR to predict the total amount of revenue that your business generates from active subscriptions in one month.

This includes active charges to existing subscriptions, as well as discounts, recurring add-ons, coupons, and more. However, it excludes one-time fees. 

Calculating your recurring monthly revenue is easy. You simply multiply your current number of monthly customers (or subscribers) by the average revenue per user (ARPU). 

Knowing your MRR helps you understand your business’s overall financial status and predict future earnings (or areas you can improve to earn more money‌). 

Here’s the monthly recurring revenue formula: 

MRR = Number of monthly subscribers x ARPU

A monthly recurring revenue example might look something like this. If you have 45 subscribers who pay an average of $250 per month, your MRR is $11,250. 

To find your annual recurring revenue (ARR), simply multiply your MRR by 12.

Here’s the annual recurring revenue formula:

ARR = MRR × 12 

Working off the MRR calculated above ($11,250), multiplying that value by 12 yields an ARR of $135,000.

[Related: Net working capital: How to calculate it and why it’s important]

Types of MRR and how to calculate them

To understand why your MRR may be falling or rising, you must understand and track the different factors that go into the metric. 

You can do this by breaking down MRR into different types. Each type offers its own insights into customer behaviour, revenue, and your business’s general growth and profitability. 

Let’s explore the different types of MRR. 

New MRR

New MRR is any additional revenue you gain from new customers within one month.

For example, let’s say your business gains seven new subscriptions, each costing $125 per month. You can calculate your new MRR by multiplying seven by $125. The result is $875.

Upgrade MRR

Upgrade MRR is similar to new MRR in that it considers any additional revenue gain within one month. However, the upgrade MRR is based on existing subscription plans being bumped up to premium ones that cost more per month. 

You should also consider any subscription add-ons when calculating your upgrade MRR. 

For example, if an existing customer has a basic subscription plan that costs $35 per month and upgrades to a premium plan that costs $90 per month, the upgrade MRR is $55.

Customers with basic subscription plans who apply for premium ones as well as add-ons would look something like this (depending on your prices):

Upgrade MRR = (premium plan subscription cost – basic subscription plan cost) + subscription add-on price

Downgrade MRR

Downgrade MRR is the amount of revenue that’s decreased because a customer moved from an existing, higher-cost subscription plan to a lower-cost monthly subscription plan. 

A customer who downgrades from a premium subscription plan to a basic plan will reduce your MRR. For example, if your premium plan costs $150 per month and your basic plan costs $80 per month, your downgrade MRR is $70. 

Expansion MRR 

Expansion MRR refers to any additional revenue gained from existing customers from one month to the next. In other words, it’s a specified month’s revenue compared to the previous month’s revenue. The difference is your expansion revenue – it will always be a positive value. 

Most businesses see growth MRR from subscription add-ons, cross-selling, and/or upselling services and/or products. 

A positive expansion MRR indicates your business is retaining customers and thus developing a loyal customer base. This is great for your business – your bottom line (overall revenue) is increasing because you’re gaining more money from existing customers without spending money trying to attract them. 

High customer acquisition cost (CAC) ultimately lowers your bottom line. 

Here’s how to calculate your monthly expansion MRR percentage:

Expansion MRR = (Revenue for specified month ÷ Total MRR at the beginning of the month) x 100

Reactivation MRR

Reactivation MRR is your monthly revenue gained from previous customers who returned to a paid plan. It’s related to the churn rate. Your reactivation MRR is the profit you earn from customers who have been lost but have since returned.

For example, if 10 of your lost or churned customers reactivate accounts that cost $35 per month, your reactivation MRR for that month is $ 10 x $35, which equals $350. 

Contraction MRR

Contraction MRR is the amount of revenue your business loses from subscription downgrades and cancellations within one month. 

Customers pausing subscriptions, paying for subscriptions with credits rather than money, using discounts or maybe stopping add-ons that they previously had all factor into contraction MRR. 

This might seem awfully similar to a downgrade MRR, but the difference is that contraction MRR considers other reasons your monthly revenue may decrease. Downgrade MRR focuses entirely on money lost due to downgrading a subscription plan for a lower-cost one. 

For example,‌ you offer a 50% one-time monthly discount to 20 of your most loyal customers. Each customer’s monthly cost will likely vary, but let’s say they all have a premium subscription plan that costs $80 per month. You can find your contraction MRR by taking these steps:

1. Take 50% off your premium subscription plan cost: 50% (or 0.5) x $80 = $40.

2. Multiply that value ($40) by the number of customers you’re giving a discount to: ($40 x 20 customers = $800). 

3. Note that your contraction MRR is $800 for that month.

Churn MRR

Churn MRR refers to the revenue your business loses due to subscription cancellations within one month.

For example, maybe 12 customers who pay $200 per month for their subscriptions end up cancelling. Your monthly churn MRR is $2,400. 

Net new MRR

Net new MRR is the amount of revenue that’s increased or decreased within one month compared to the previous month. 

Here’s the net new MRR formula:

Net new MRR = (new MRR + expansion MRR) – churn MRR

A negative net new MRR means the sum of your new MRR and expansion MRR is less than your churn MRR. Unfortunately, you’ve lost revenue for that month. Alternatively, if your net new MRR is positive, you’ve gained revenue. 

For example, in one month, you may have gained 10 new customers who signed up for basic subscription plans that cost $80 per month. Additionally, 12 of your existing customers may have upgraded their $80-per-month plan to a premium plan that costs $150 per month. However, six of your other existing customers who had the $150 per-month subscriptions cancelled their plans. 

You can calculate your monthly net new MRR by following these steps:

1. Multiply the 10 new customers by $80, which equals $800.

2. Multiply the 12 existing customers by the cost difference of their older, lower-cost plan, compared to their more expensive, premium subscription plan. In this case, 12 × ($150 – $80) = $840.

3. Add the totals from steps one and two. So, ($800 + $840) = $1,640. 

4. Multiply the number of customers who churned by the cost of their cancelled subscriptions. In this case, 6 churned customers x $150 per month = $900.

5. Take your total from step three and subtract the total from step four: $1,640 – $900 = $740.

6. Note that your net new MRR is $740.

How to analyze MRR

Most business owners and employees recognize the importance of providing high-quality products and services. Along with great customer service, this is what keeps customers coming back for longer. You can’t retain customers if they aren’t happy with their purchase(s) and/or the help you give them. 

However, it’s equally important to monitor your financial metrics. In the SaaS business, MRR is one of the most crucial metrics to monitor. 

You usually base SaaS monthly recurring revenue on subscriptions. New customers are always signing up, and existing customers are consistently either upgrading or cancelling their subscriptions. This causes revenue fluctuation, which isn’t always a negative thing in the long run. 

Analyzing your MRR helps you capture why, where, and how much your revenue fluctuates. It enables you to identify areas of your business that can be improved. 

Simply calculating your regular monthly revenue is misleading and hardly helpful because it doesn’t consider changes in subscription plans (which are common). 

MRR makes it easy to analyse your business’s financial health and predict future revenue. Ultimately, you can make smarter decisions when it comes to investing, budgeting, and scaling your business to grow.

[Related: Determining payback periods: How to plan for startup success]

Why is tracking MRR important for your business?

Let’s take a closer look at the specific areas that MRR tracks and why they’re important to monitor. 

Budgeting

MRR represents current and future monthly revenue and growth. When you have an accurate idea of your monthly earnings, you can better decide where to reinvest and save. 

MRR also pinpoints business areas that could benefit from more (or fewer) resources, such as more employees to handle customer service. 

Tracking performance

One month is a reasonable amount of time to measure your business’s subscription growth. By comparison, one week is too short for anything substantial to happen (or measure), and one year is too long. 

The monthly recurring revenue model recognises smaller amounts of revenue that gradually come in. Knowing your business has a steady flow of income ensures your operations are sustainable. But to know this, you must first examine your MRR. 

It shows your month-to-month trends and provides valuable insights into your business’s financial health (e.g., meeting quotas). 

Additionally, periodically reviewing your MRR throughout the year helps you establish long-term goals. 

Forecasting revenue

To make accurate sales predictions in the short and long term, you need to look at MRR. 

Your monthly financial performance usually indicates how your business will perform in subsequent months. If your current monthly performance isn’t as strong as you’d like, you can change your sales and/or marketing efforts to improve the next month’s MRR.

[Related: How to calculate and improve ROI in easy steps]

How to improve monthly recurring revenue 

Now that you know the different types of MRR and how to calculate them, you might be wondering how to improve your monthly recurring revenue model.

Here are a few tips to help you improve your MRR.

Increase prices

One way to increase your MRR is to increase the prices of your products and/or services. 

However, if you increase your prices, you should ensure quality goes up, too. If you don’t, loyal customers might wonder why they paid less in the past for the same-quality goods and services. 

But how do you improve quality? It doesn’t necessarily require making something “shinier.” It means incorporating more attentive customer service or even adding more (or better) features to your subscription services. 

Note: Make sure to always notify customers of price increases. If you don’t, you could lose them. Worse, you could face legal consequences. 

Offer different plans

Another way to increase your MRR is to offer plans at different price points. 

Some businesses have a free, basic product. However, if a customer upgrades their plan to premium, they’ll gain access to several additional features. 

Having different plans offers variety. Customers will enjoy the freedom to choose what works best for them, depending on what features you include in each distinct plan. 

However, ensure you include your business’s most valuable features in the highest-priced plan. 

Create upsell opportunities

Upselling is one of the most effective ways to increase your MRR, as it introduces customers to enhanced features or premium plans that they may choose to upgrade to. 

As mentioned, it’s beneficial to have different priced plans – when you have variety, it’s easier to find upsell opportunities. 

For example, your basic plan might offer 10 free project accounts. However, when a customer eventually reaches that cap and needs more project space, it creates an ideal opportunity for you to upsell a premium plan and thus increase your revenue. 

Retain more customers

Fine-tuning your retention strategy will do wonders for your recurring revenue. When you retain a higher number of customers, you increase your loyal customer base while also reducing customer acquisition cost (CAC). That’s because you’re putting effort into making your loyal customers happy rather than attracting new ones!

Here are some ways to improve customer retention:

• Create a loyalty program

• Offer promotionals deals, discounts, and bonus perks 

• Improve your customer care and customer relationship management (CRM)

Pay attention to customers

Another way to improve MRR is to listen to customers. They typically know exactly what they want, so why not speak to them directly?

Try implementing a customer feedback system so you can get direct input from your customer base. Once you gain a better understanding of your customers’ wants and needs, you can make improvements that actually make a difference in terms of your MRR.

Pursue more leads

To improve your MRR, consider revisiting your original marketing plan. 

When you go back to the drawing table – while comparing what currently is and isn’t working well – you can pinpoint where and how to tweak your strategy. A better approach will help you gain (and retain) more leads. 

For instance, your business may have a greater budget as it’s grown over the months or years. If that’s the case, you can likely afford new marketing tactics.

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