For businesses with a recurring revenue model, monthly recurring revenue (MRR) is the amount of money they can expect to earn every month. It’s also a way of averaging different pricing plans and billing periods into a single number that you can track over time.
In other words, MRR is the fuel that keeps the engine of your business running.
This article explains how to calculate four types of MRR, outlines the difference between MRR and ARR, and provides two strategies for increasing MRR.
How to Calculate MRR
To calculate MRR, multiply the number of customers you have by the average amount you bill them.
MRR = number of customers × average billed amount
In addition to tracking MRR, businesses should also keep a pulse on their MRR growth rate, which expresses the change in MRR from one period to another (usually month to month).
MRR growth rate = (MRR today ÷ MRR 30 days ago) × 100
Your MRR growth rate answers the question: How quickly are we growing?
A declining MRR rate is an early indicator that you need to improve your acquisition and retention efforts.
Other Types of MRR
The basic MRR formula doesn’t allow for much nuance. Below are five types of MRR that you can calculate based on different customer events:
- New MRR: MRR earned from new customers
- new MRR = new customer 1 MRR + new customer 2 MRR + new customer 3 MRR…
- Expansion MRR: MRR earned from existing customers upgrading their account through upgrades, cross-sells, and add-ons
- expansion MRR = (expansion MRR at the end of the month − expansion MRR at the beginning of the month) ÷ expansion MRR at the beginning of the month
- Reactivation MRR: MRR earned from previous customers signing up again
- Reactivation MRR = reactivated customer 1 MRR + reactivated customer 2 MRR + reactivated customer 3 MRR…
- Contraction MRR: MRR lost from existing customers (downgrades)
- contraction MRR = downgrade MRR + cancellation MRR
- Churn MRR: MRR lost from customer cancellations
- churn MRR = lost MRR from customer 1 + lost MRR from customer 2 + lost MRR from customer 3…
MRR vs. ARR (annual recurring revenue)
There’s MRR, and then there’s ARR.
Annual recurring revenue (ARR) is MRR multiplied by twelve to reflect a yearly value. It’s also known as annual rate rate.
ARR = (number of customers × average billed amount) × 12
Businesses use ARR primarily to quantify their company size. For example, if someone says they have a $1 million business, they probably mean they’re currently earning $1 million in annual recurring revenue.
How to Grow MRR
Growing MRR is key to building a sustainable recurring revenue business. Here are two tried and trusted strategies for growing MRR that you could implement right away and that could have a major impact on your business.
1. Set an MRR growth goal for the entire team
Many businesses create MRR growth goals on both a quarterly and an annual basis. Setting goals is a surefire way to keep a team aligned on business priorities and the progress being made toward achieving them.
Pro tip: Track MRR growth goals in Baremetrics, where all team members can view progress in real time.
All teams contribute to MRR growth. Here’s an example of how responsibilities might be distributed at an SaaS company:
- The marketing team creates campaigns and content that bring in the right customers.
- The sales team nurtures and converts leads.
- The customer success team handles customer onboarding and any issues that customers encounter while using your product.
- The engineering team maintains and improves the product to ensure that customers are satisfied with what they’re paying for.
Moreover, MRR growth goals help individual teams create their own goals and understand business priorities.
For example, the sales teams can better prioritize which leads to devote resources toward converting. A customer that would bring in $200/month is more valuable than a $20/month customer.
2. Implement a dunning process to reduce churn
If you’re thinking that “reducing churn is easier said than done,” you’re correct. One particularly challenging contributor to churn is failed charges.
Failed charges occur when credit cards expire or have run out of funds or when the customer enters incorrect credit card information. The customer usually has no idea that there’s an issue, and you don’t either until their payment doesn’t go through.
If the customer doesn’t update their information in time, they’ll churn involuntarily. Involuntary churn looks like this:
Fortunately, implementing a dunning tool, such as Recover, can help you prevent failed charges before they happen.
Dunning tools help you engage with the customer immediately after a failed charge happens. Then, by sending automated follow-up emails, you can remind your customer to update their credit card information. This way, the customer is much more likely to take action, pay you, and remain a customer.
Here’s how dunning processes stop a failed charge (the key is in the emails!):
To learn more about dunning and what to include in effective follow-up emails, check out this guide to dunning management.
Grow MRR faster with Baremetrics
Baremetrics makes it easy to track and set MRR goals, and with Recover, you can implement an automated dunning campaign to prevent failed charges and keep your money in your pocket.
If you’re using the Crowdz recievables marketplace to improve your cash flow, you should be using Baremetrics to obtain actionable insights from your data. Check out our live demo, which uses Baremetrics’ actual company data, no sign-in required.
Written by: Lea LaBlanc, Head of Marketing and Content at Baremetrics — subscriptions analytics and insight tool for SaaS businesses. She is a content marketing expert with a demand generation and SEO background and passion for building relationships and community.