What is MRR?
MRR refers to the predictable income a business will receive each month – its monthly recurring revenue.
The most common type of business with high MRR is a subscription service, usually a SaaS tool. With a subscription model, it’s easy to predict the monthly income based on the number of people signed up for your product or service.
If you have 100 subscribers, you can predict that you’ll receive, on average, 100x the monthly subscription price each month.
How to calculate MRR
Calculating MRR is simple. You can use the following formula:
Average number of monthly subscribers x average cost of 1 subscription = MRR
So, if your subscription is $50 a month and you have 100 monthly subscribers, your MRR is $500.
If you have customers with yearly subscriptions, you can divide their annual plan by 12 to calculate the monthly price they pay. Add that figure to your MRR calculation.
Why is tracking MRR important?
Keeping track of your MRR gives you a baseline to track your growth and understand where your income comes from. If your MRR is consistently growing, it shows your business model is working and your price plans are in line with customer expectations.
Measuring your monthly recurring income can help you make informed business decisions and forecasts. It can help you decide where to spend your marketing budget and which areas of the business need the most attention. An overview of MRR can help you make decisions about strategy and cost savings.
How to predict your MRR
Once you calculate your MRR using the formula above, you’d think you have a pretty easy way for predicting the next month’s income.
There are a few things to take into consideration to make the prediction as accurate as possible:
- Account for customer churn – how many customers cancel their subscription per month?
- Account for customers who have a discounted rate or special deal
- Include upgrades to plans or subscriptions
- Don’t include one-time purchases in your MRR calculation
- For customers with a yearly plan, divide their payment by 12
- Do you have a consistent growth rate and minimal churn each month?
When predicting how many new customers you should get each month, look at your acquisition channels and how much you’re investing in those channels. Can you increase the investment in your best channels, and will this impact your number of new customers?
If you have consistent growth numbers, you should be able to predict how many new customers you can expect on a month-by-month basis.
Why is a business with MRR a good model?
When you have consistent MRR, you have a predictable income. It makes it easier to predict patterns, sustain growth, and plan for the future.
A business with MRR is a sustainable business model as you don’t have to go out and find new customers monthly. Once you first acquire the customer, you have consistent revenue from them without the customer acquisition costs.