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.
How to Calculate Monthly Recurring Revenue
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.
Top-Down Method for calculating MRR
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).
Bottom-up Method for calculating MRR
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.
Connecting Monthly Recurring Revenue to your Business
Monthly recurring revenue is an important metric because it can help you determine if your business model is scalable. This is one reason why monthly subscriber metrics are often used by investors and analysts. They can help determine if monthly recurring revenue will continue to increase over time which helps measure your company's potential for growth.
If monthly recurring revenue is increasing, then you are more likely to be able to pay back investors and maintain a good valuation on the stock market since monthly recurring revenue metrics show that your business model is scalable . However, monthly recurring revenue growth starts to slow over time, it may be a good idea to look at other areas of your monthly revenue and product offerings to find ways to improve.
For example, you can offer additional monthly services that could increase monthly recurring revenue or test new monthly products. Either way, monthly recurring revenue is a useful metric for evaluating monthly subscription businesses.
Tracking Monthly Recurring Revenue with Lido
While monthly recurring revenue is easy to calculate, it’s important to keep in mind that MRR are one of many valuable metrics to track your performance. If you don’t want to spend hours at the end of the month juggling numbers from your Stripe account, consider trying Lido. Lido can help you build a dashboard to monitor your data and give a look into how your key metrics (such as monthly recurring revenue) change over time.
Sign up for free and get started today.