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For SaaS businesses, Monthly Recurring Revenue (MRR) is the lifeblood of their business. This revenue stream is how you keep the lights on and allow for growth because it's predictable. If you're running a SaaS company, then this guide will be your best friend in writing proposals, speaking with investors, or writing up contracts.
Let's start with the basics: monthly recurring revenue (MRR) is essentially monthly subscription revenue for a given month. MRR describes the total monthly subscription revenue generated from a monthly product offering.
There are two ways for you to calculate monthly recurring revenue: top-down and bottom-up . Both methods will give you the same monthly recurring revenue number, so it doesn't matter which method you use.
The top-down monthly recurring revenue calculation estimates monthly recurring revenue by starting with your annual or quarterly MRR and then estimating monthly retention rates for the next year (or quarter). This monthly recurring revenue estimate is multiplied by 12 to give an approximate monthly value.
For example, let's say you have monthly revenue of $5,000 (annual) and you think monthly retention rates could be anywhere between 20-30% next year. Your monthly recurring revenue would then be $12,500 to $15,000 ($5,000 x 12 monthly payments).
The bottom-up monthly recurring revenue calculation estimates monthly revenue by breaking down monthly revenues by the number of customers, monthly average revenue per customer (ARPU), and monthly churn.
For example, let's say your monthly service is $19/month with an average monthly ARPU of $39. Let's also assume you have 100 monthly customers for this service with a monthly churn rate of 10%. To calculate monthly recurring revenue, you would use the following calculation:
$19 monthly service x 100 monthly customers = $1,900 monthly recurring revenue for this service
In our example here, monthly recurring revenue from this monthly subscription services would be $2,400 ($1,900 + 20% monthly churn). This number can be adjusted to monthly recurring revenue depending on your monthly churn rate.
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