Monthly Recurring Revenue: How to Calculate and Increase MRR?

Running a subscription-based SaaS business can feel like a rollercoaster ride. Every change in your active subscriber count directly impacts your revenue. Whether you're gaining or losing customers, these fluctuations profoundly affect your business's growth and financial stability.

So, how do you accurately measure and track your monthly revenue? 

That’s where Monthly Recurring Revenue comes into play. MRR is a key metric that gives you a clear picture of your revenue growth each month. It’s an essential indicator of your SaaS business’s financial health.

In this blog post, we’ll explore the fundamentals of MRR, how to calculate it, and the different types of MRR. We will also discuss effective strategies to increase MRR growth and achieve long-term business success. 

Let’s first learn what MRR is. 

What is Monthly Recurring Revenue (MRR)?

Monthly Recurring Revenue (MRR) is a critical metric for measuring the predictable monthly income of your SaaS business from all active subscriptions. It highlights the revenue growth driven by existing customers, such as when they upgrade to a higher pricing tier and the revenue loss when they cancel their subscriptions.

Understanding MRR's role in your subscription-based business helps you assess your growth potential and scalability.

Why Tracking MRR Matters for Your SaaS?

Tracking your Monthly Recurring Revenue (MRR) helps you determine revenue growth every month. It provides a clear view of your business's financial health and profitability. Here are several vital reasons why tracking MRR is essential for your SaaS or subscription-based business:

1. Assess business performance

MRR reflects how your subscription-based business performs monthly. It allows you to determine whether your revenue growth is sustainable and confirms a stable cash flow. It is a reliable indicator of financial performance over time, helping you spot market trends that influence your overall business health. 

Understanding month-over-month performance also helps you identify what strategies are working. It allows you to make data-driven adjustments to ensure long-term revenue growth and scalability. 

2. Predict financial growth

Calculating MRR is the best way to predict future cash flow and revenue streams. In the SaaS business model, monthly revenue helps predict financial projections accurately. 

Once you calculate the MRR of subsequent months, you can forecast your revenue growth, plan your investments, and ensure you have enough funds to achieve your financial goals.

3. Plan your budget wisely

MRR helps you predict monthly revenue growth, allowing you to align monthly income with customer acquisition costs and other expenses. This metric gives you an accurate overview of your available resources, enabling you to create a realistic budget and make well-informed investment decisions for your business.

Additionally, it allows you to allocate resources strategically to critical areas, such as marketing campaigns, product development, and operational expenses. This approach ensures that your expenditure is within your revenue and supports sustainable business growth.

4. Gather customer insights

Tracking MRR lets you understand how customer segments contribute to your revenue and overall business growth. It enables you to identify which customer segments are investing in your products or services and discover ones that require more focused sales and marketing efforts.

Additionally, it helps you analyze the sources of new customers acquired and evaluate the associated customer acquisition costs (CAC). These insights provide adequate customer data to refine your retention strategies, improve customer engagement, and increase future revenue growth.

How to Calculate MRR for SaaS?

The formula for calculating MRR is simple. But, it varies depending on the types of MRR you’re analyzing, which we will discuss in the next section. 

For now, here’s the standard formula to calculate MRR: 

Formula:

Let’s break down the formula to calculate MRR:

• Total no. of customers who subscribed to your product or service. 
• Average Revenue Per User, or ARPU, represents the revenue generated on average from each user.

Calculating Average Revenue Per User (ARPU) is a valuable indicator for a SaaS company. It allows us to evaluate the marketing, sales, and retention strategies.

Let us look at an example to understand MRR calculation:

Suppose your business has two subscription pricing models:

1) Basic - costs $100
2) Premium - costs $200/month 

In a given month, the business has 100 customers subscribed to the basic plan of $100/month and 80 subscribed to the premium plan of $200/month.

Total MRR = (100 x $100) + (80 x $200) = $36000

The total MRR is $36000, which means you earned this much income from your 180 customers monthly. This is the standard formula we used to measure revenue from monthly subscriptions.

The formula for calculating MRR can vary depending on the MRR you're tracking. Let’s discuss its different types and understand the variation.

What are the Different Types of MRR?

MRR predicts revenue growth by analyzing customer behaviour and patterns, indicating that fluctuations in recurring revenue are tied directly to customer actions. Tracking the factors influencing this key metric helps you gain deeper insights into customer behaviour and patterns.

Below are the different types of MRR that provide valuable insights and help you analyze changes: 

1. New MRR

This MRR measures the revenue generated from new customers who’ve recently subscribed to your product or service within a specific month. It represents the growth in the customer base.

For instance, if your sales team signed up ten new customers in a given month and subscribed to a $50/month plan, then 

New MRR for that month = 10 X $50 = $500

Calculating New MRR can help your sales and marketing team gain insights into the number of new customers they need to acquire. It allows you to refine customer acquisition efforts and align your marketing strategies. 

2. Expansion MRR

This metric measures the additional revenue gained from subscribers in the current month compared to last month, excluding MRR contributed by new users. The additional revenue from existing customers is generated in three ways: 

• Upsells: Customers go from a freemium or basic version to a premium version of your SaaS. 
• Cross-sells: You offer a unique or complementary product or service that adds value to their current subscription. 
• Add-ons: Customers purchase widgets, features, and add-ons that are not part of their current subscription.

Formula:

For instance, your business’s expansion MRR at the beginning of October is $1600, and at the end is $2,000.

Total Expansion Rate = ($2000 -$1600)/ $1600 X 100 = 25%

Calculating expansion MRR helps you determine customer satisfaction and engagement with your product. 

3. Upgrade MRR

This MRR metric refers to the additional revenue generated when existing customers upgrade their subscription plans or purchase add-ons in a SaaS business. It helps you to evaluate the growth of customers who are already using the product but choose to move to a higher-paying tier or expand their usage.

Formula:

For instance, if you have five customers who upgrade their plans from $50/month to $100/month, then 

Upgrade MRR = ($100 - $50) X 5 = $250

This means your business earned $250 from upgrades only in a month.

An increase in your upgrade shows that your SaaS business is growing in revenue without needing to invest in acquiring new customers. It indicates that your product is scaling as your customers scale.

4. Reactivation MRR

Reactivation monthly recurring revenue calculates the revenue generated by previous customers who cancelled their subscriptions and returned to purchase your SaaS product. It indicates the profit gained due to customer retention in the given month.

For example, if 10 of your churned customers reactivated their accounts and each purchased a paid version of your product for a $50/month plan, then your Reactivation MRR is $500. 

This valuable metric shows that your product delivers unique value that competitors may not offer. It can help you win back customers who previously left, highlighting the effectiveness of your customer retention strategies.

5. Churn MRR

This monthly recurring revenue refers to the total amount your business lost due to subscription cancellations or non-renewal of your product by existing customers over a specific month. A decrease in total MRR for a SaaS business results from this.

For instance, if 5 of your customers, each paying $2000/month, cancelled their subscriptions in the same month, your churn MRR is $10,000 for that specific month.

A high Churn MRR indicates customer dissatisfaction or a need for enhanced retention strategies, directly impacting revenue growth.

6. Net New MRR

This metric highlights how much monthly revenue increased or reduced in the current month compared to the previous month's MRR.  To calculate Net New MRR Growth, focus on three key elements: revenue generated from new paying customers, upgrades from existing subscribers, and the MRR churn rate.

Formula:

Suppose, in this month, you've gained five new customers who are paying $100/month. Meanwhile, ten current customers moved to a higher-tier plan for $200/month. But,  5 of your customers, each paying $100/month, were churned out.

Then, Net New MRR = ($5 x $100) + ($10 x $200) - ($5 x $100) = $500 +$2000 - $500 = $2000

If the sum of your New MRR and Expansion MRR is less than your Churn MRR, you've lost revenue. When it's higher, you've gained revenue.

7.  Downgrade MRR

Downgrade MRR reflects the decline in monthly revenue from active subscriptions compared to the previous month. This may happen due to changes in pricing plans, removal of add-ons or features, or availing themselves of discounts.

Formula:

For instance, if a subscription (customer) has moved from plan A (MRR $500) to plan C (MRR $100), then the Downgrade MRR would be $400. 

High Downgrade MRR highlights that your customers need help finding enough value in their current plans for the price they pay.  When you see a Downgrade MRR rising, analyze customer feedback to understand the problems and adjust your strategies. 

8. Contraction MRR

This performance metric tracks the total decrease in MRR due to downgrades and cancellations. It occurs when existing subscribers cancel or downgrade their plans by removing features, reflecting the revenue lost per subscriber.

Formula:

Estimating Contraction MRR allows you to determine how well your business retains customers and supports customer growth alongside product growth. High contraction MRR indicates that you must refine your pricing and retention strategies.

How to Increase the MRR of SaaS Business?

Increasing your MRR is key to maintaining your business's steady growth and financial health. With the right strategies, you can find the essential areas that need your attention and help you maximize the value of your SaaS. Here are effective strategies to increase your MRR growth: 

1. Refine your pricing structure

Optimizing your pricing model is one of the most impactful ways to grow your MRR. Implementing flexible, tiered pricing allows small businesses to start with a basic plan and scale up as they grow.

For larger enterprises, usage-based pricing can be highly effective, where customers pay according to their product consumption. 

This strategy supports your customers' growth, increasing their investment as product usage expands. Aligning your pricing structure with customer needs ensures their growth and increases your MRR. 

2. Upsell to current customers

Upselling is an effective strategy for boosting recurring revenue and monthly subscription income. It encourages customers to upgrade to a higher-priced plan or choose newly added features. 

To encourage customers to upgrade their payments, offer relevant upsells at the right time—such as when they hit usage limits or achieve critical milestones.

Upselling to existing customers becomes easier when they recognize the value of your product, making them more likely to invest in higher-tier plans. It boosts your MRR growth and strengthens customer loyalty by addressing their evolving needs.

3. Focus on customer retention

Improving customer retention is a critical factor in achieving long-term financial success. It boosts your revenue and saves the cost of acquiring new customers. Enhance customer retention by providing exceptional support, running loyalty programs, and continuously improving your product.

A SaaS company must provide excellent customer service, build strong customer loyalty, and continuously improve products and services to enhance customer retention. When customers feel valued and satisfied, they are more likely to become brand advocates, share their positive experiences, and help attract new customers. 

4. Expand upmarket

Moving upmarket allows you to target larger customers with bigger budgets and complex needs. Enterprise-level clients often have larger budgets and are willing to enter into long-term, multi-year agreements, resulting in substantial increases in MRR and Annual Recurring Revenue (ARR). 

You can tailor your customer acquisition and retention strategies to target customer groups likely to invest in your product. You can also make adjustments during product development to meet the needs of larger customers and drive significant growth potential.

5. Run loyalty programs

Loyalty programs are effective strategies for increasing MRR. These initiatives can attract new customers, encourage existing ones to upgrade, and build long-term commitments with your product. 

Offer discounts and rewards through loyalty programs strategically around product updates and seasonal trends to encourage subscription reactivation and upgrades to higher plans. Track customer retention metrics to evaluate the effectiveness of these loyalty programs and use the insights to refine future strategies.

6. Reduce customer churn

A high churn rate lowers your MRR and growth potential.  Common causes of churn include poor customer service, inadequate onboarding, and complex features that are difficult to navigate. 

To reduce churn, optimize the customer onboarding process, improve product usability, and offer excellent customer support. Refining your onboarding and retention strategies can improve customer satisfaction, reduce churn, and increase your MRR.

Common Mistakes to Avoid While Calculating MRR

When calculating Monthly Recurring Revenue (MRR), including non-recurring charges can distort revenue figures and make predicting revenue projections difficult. 

Here, we will discuss which non-recurring charges are not to be included in your MRR calculations. 

1. Incorrectly accounting for non-monthly billing intervals

While monthly billing is the most common, annual, quarterly, and weekly billing intervals are also often used. It's important to account for these non-monthly billing cycles when calculating MRR accurately.

For example, if your annual plan costs $1200, divide it by 12 months to get an MRR of $100 monthly. This allows you to adjust your accounting accurately and incorporate non-monthly billing intervals into your MRR calculations.

2. Including non-recurring revenue

Non-recurring revenue refers to one-time payments, such as setup fees or costs tied to instalment plans, that don't occur automatically each month. These unpredictable payments only recur occasionally, making them unreliable for consistent revenue forecasting.

Including non-recurring revenue in your MRR calculations can negatively impact the company's financial health. For accurate MRR, only include revenue from subscriptions that automatically renew each month until the customer cancels.

3. Including leads and trials

Many SaaS companies mistakenly include customers on free trials or leads who have yet to convert into paying customers in their MRR calculations, which can lead to inaccurate revenue figures. 

When offering free trials or generating leads, focus on converting them into paying customers before adding them to your MRR. This approach ensures that your recurring revenue figures positively reflect your business's financial health.

4. Ignoring coupons & discounts

Excluding coupons and discounts from MRR calculations can make your revenue look higher than it is. Discounts reduce the amount customers pay, so including them in MRR gives you a clearer picture of your accurate monthly income. 

Tracking discounts also helps you see how promotions affect long-term revenue and customer loyalty, enabling you to make better decisions about future loyalty campaigns.

Track your MRR to Scale your SaaS Revenue Growth

This key SaaS KPI provides valuable insights into your monthly performance. With a clear view of your financial health, you can develop strategic plans that attract investors and drive scalable growth. 

At LabsMedia, a leading SaaS marketing agency, we specialize in increasing MRR through targeted strategies focused on customer acquisition and retention, ensuring sustainable business growth.

Need assistance? Connect with our expert today!