Understand what is MRR (Monthly Recurring Revenue) and how to calculate your company’s – WAU
MRR stands for Monthly Recurring Revenue and indicates the amount received monthly by a company in view of the payment of its usage subscriptions.
It can be said that MRR is even more important for companies in the SaaS world, or Software as a Service. Since it is this number that unites the financial and strategic sectors, defining the future of the company.
Read on to learn how to calculate your business’s MRR, its importance for strategic planning and, of course, surefire tips for you to increase your monthly recurring revenue. Check out!
What is MRR
MRR is the calculation of how much the company will receive monthly for subscriptions to use its products or services. It is through this metric that business leaders are able to predict monthly earnings and, consequently, plan future investments.
There are some administrators who believe that MRR is the most important index for SaaS companies. The justification is that it is through a well-done calculation that the software roadmap will be created in the most real way possible.
It is important to say that, when well calculated and used, the MRR will predict the company’s growth. Since it is possible to know when contracts with your customers should be renewed, for example. On the other hand, there is also greater control over how much each churn is impacting your Monthly Recurring Revenue.
In summary, it is by calculating the MRR that it is possible to track new customer entries, contract renewals and churn (subscription cancellation).
As we said, MRR makes the relationship between the financial and the strategic part of your client. When calculated correctly, the MRR it is the best way to make predictions, identify bottlenecks and seasonal behavior.
How to calculate the MRR
It is common to calculate the MRR the wrong way, just adding up all the contractual amounts that you must receive monthly. This may even be correct, but before hitting the hammer, you should check if there are any variables that can impact this value.
Before showing in a practical way how to calculate your company’s MRR, we will explain the factors that should be taken into account in this account.
Number of monthly subscriptions
To start calculating the MRR you need to know how many signatures and the value of each one. This number is the basis of the account. If the company works with plans of different values, it is crucial to identify how many signatures there are for each type of contract.
Knowing the amount of contracts that your company has, it is necessary to check the expiration dates of each one of them. The purpose of this is to know how much non-renewals can impact your MRR. Operationally speaking, from there the responsible team will know where to allocate their efforts in order to follow up with customers with a new contract.
Do not forget to consider the values that are not repeated. For example, hiring some extra service. In addition, when it comes to SaaS companies, it is common to charge an implementation fee, which should also be considered when calculating the MRR. At this point it is also important to take into account promotions and negotiations on the monthly fees offered to customers.
Churn is nothing more than customer turnover. Therefore, it is an extremely important value for the calculation of your MRR. After all, when someone cancels the subscription, the monthly payment is stopped. As a result, you will receive less money at the end of the month on a recurring basis.
Just as canceled subscriptions must be part of the calculation, new sales are also essential for such an account. Considering new sales and churn, you can see that your MRR will not always be the same every month. Furthermore, it is through this balance between these two factors that the MRR forecast for the future is realized.
A single currency
In the hyperconnected world in which we live, it is common for a service or product to be offered in more than one country. Therefore, in order to know the actual MRR, it is important to convert the values to just one currency. Preferably the country of origin of the business.
Calculation of MRR
After identifying and calculating all variables, then the list of monthly fees to be due must be made.
To help you, let’s take a practical example. Let’s say that I have an application similar to Netflix, and to use it you need to hire a subscription. Currently, my application has 2 thousand subscriptions, in which the client pays, monthly R $ 100. The calculation would be:
2000 x $ 100 = $ 200,000
To disregard the values of the variables mentioned above, just subtract the total value from its sum. Or, add, if referring to new sales or upgrades.
For better visualization, we can apply this situation in the previous example. In the month, we had 50 new customers. However, we lost 10 subscriptions. See how the account looks:
2000 x R $ 100 + (50 x R $ 100) – (10 x R $ 100) = 204,000
It is important to differentiate between these values. Therefore, the amount we add is called New sales MRR. The number we subtract is known as churn MRR.
It is important to bring these segmented numbers to the team so that everyone has a visualization of the strengths and weaknesses of the process.
Calculating average revenue
Another important indicator to be calculated is the average revenue. It is directly linked to your MRR, so we’ll cover it here. Average revenue is also known as ARPU, which stands for Average Revenue Per User.
It is through this value that the main growth factors, as well as their barriers, are analyzed. To find your average revenue, simply divide your total sales by the number of customers in a given period of time.
How to Increase the MRR
One of the most important reasons that stimulate the calculation of MRR by entrepreneurs, is to identify how much you are earning to create actions and strategies to increase it.
So that this indicator does not become something frustrating for you, we have selected some tips to show you how to increase your MRR. Check out!
1. Customer loyalty
The famous Philip Kotler already claimed that winning a new customer costs 5 to 7 times more than keeping a current one. Also, when we showed you how to calculate the MRR, it was clear how your churn rate impacts your monthly recurring revenue, right?
This proves the importance of having customer loyalty in its strategic planning. Understand why your customers use and maintain your service subscription. So the customer success team can work with a focus on these strengths of your solution.
There are thousands of actions that can be taken with the objective of retaining the customer. Understand what is the best option for your company. However, the most important thing is to work for your customers and users to be successful with your business.
2. Elimination of unlimited plans
When defining pricing for the product or service, the use of plans is very common. But this strategy can be a villain when the objective is the growth of MRR.
Typically, companies using the plan strategy offer the option of unlimited plan. This means that the customer can use as much and as much as they want by paying a certain amount. That is, while consumers have unlimited access, their income has a fixed and limited value.
The secret to using this plan strategy to grow your MRR is to find the balance between what is offered and what is being charged.
3. Improved customer acquisition strategy
The more customers you have, the higher the MRR, right? Therefore, when thinking about increasing the company’s monthly recurring revenue, it is essential to improve and work on strategies to attract new customers.
Therefore, test new acquisition channels. Have online and offline marketing strategies. Build your persona in order to better understand your customer and approach them more easily and effectively. Follow sales metrics daily to act quickly if any bottleneck is identified or something is not generating the expected result.
In summary, it is possible to say that MRR is an extremely important factor to be evaluated periodically. In addition, it is unique. For every model and size of business, there is an ideal value.
It is clear that it is possible to say that, regardless of the size and segment of the business, the MRR must be positive. Furthermore, it is essential to look at how much recurring monthly revenue is generated thinking about the future. That is, how to increase it.
Did you like the tips? So find out in this post how to use different tools to control, monitor and measure the results of your business.