"Don’t underestimate the value of financial data, especially in the SaaS world. SaaS metrics are your best source of intelligence when it comes to the health of your business and how it’s performing. Real-time financial data equips you with the insight you need to confidently drive performance."
Tyler Eyamie, CEO, Fusebill
What is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue (MRR) is the measure of money that is paid monthly for a subscription of a product or service.
Monthly Recurring Revenue as a core operating metric and probably the most important SaaS metric of all. Monthly Recurring Revenue is a measure of the predictable and revenue generated by customers. It provides valuable insight into sales and cash flow dynamics.
MRR is a good overall measurement of your businesses financial health. In particular, MRR can be used to figure out:
New business MRR
The MRR is counted at the moment a lead converts to a paid customer.
Expansion MRR
An increase to the MRR of an existing customer, e.g. upgrade to higher plan, discount expiration, 2nd subscription, increase in quantity.
Contraction MRR
A decrease in MRR, e.g. downgrade to lower plan, adding discounts, decrease in quantity.
Churn MRR
The MRR reduction caused by a customer cancelation or failure to renew their subscription.
Reactivation MRR
The MRR from a previously churned customer moving back into a paid plan.
It’s important to note MRR is not recognized revenue and is calculated very differently. It’s up to your organization to define the rules for calculating the components. A highly flexible subscription billing and management platform can certainly help with that.
The basic formula for MRR is simple: for any given month, we sum up the recurring revenue generated by that month's customers to arrive at your MRR figure.
MRR = Average product price per unit X the number of customers
When another customer is gained MRR increases as a result. If we have a good handle on customer acquisition and churn rates, we can even use that to extrapolate to the future, and predict future MRR.
Though the basic formula for MRR is simple, there are things to include or exclude in the calculation.
THINGS TO INCLUDE IN YOUR MRR CALCULATION:
Things to exclude:
Annual Recurring Revenue (ARR) is the most accurate way to measure and predict relationship changes as indicated by new or lost customers, renewals, upgrades, or downgrades. All of these factors affect revenue but cannot be measured with traditional accounting methods, specifically GAAP (Generally Accepted Accounting Principles).
Why is ARR important?
ARR is a good measurement of the health of a subscription business. Because ARR is the amount of revenue that a company expects to repeat, it enables measurement of company progress and prediction of future growth. It’s also an important metric for measuring momentum in areas such as new sales, renewals, and upgrades - and lost momentum in downgrades and lost customers.
ARR is particularly useful as a metric to:
ARR is typically a metric used by SaaS companies dealing primarily in annual contracts. If monthly subscriptions make up the bulk of recurring revenue, MRR is the best metric in this case.
ARR calculations can include the following:
ARR = MRR X 12
To calculate ARR, divide the total contract value by the number of years of the contract. For example, a 5 yr contract for $10,000, divide $10,000 (contract cost) by 5 (number of years) for an ARR of $2,000/year. If a customer doesn’t renew a $4,000 contract over two years, divide $4,000 (contract cost) by two (number of years) for an ARR decrease of $2,000.
ARR only includes fixed contract fees, not one-time charges. One time charges should be accounted for separately. If any extra, non-subscription charges are lumped into ARR, the results will be skewed and not reflect the true ARR calculation.
Billing cycles don’t affect ARR, as long as the term of the subscription is a year or more and is recorded the same regardless of how payments are structured.
Next to MRR, churn is probably the most widely discussed subscription metric. While there are many variations of churn, churn is always a measure of attrition or loss, and it can be lost customers, contracts, MRR, GAAP revenue, contract value, or bookings. Churn is most frequently expressed as a rate or ratio (churn rate of 12%), but churn can also be discussed as a whole number ("churned 10K of MRR" or "churned 2 customers"). When discussed as a rate, Churn is the inverse of your renewal rate. An 80% renewal rate is the equivalent of a 20% churn rate.
Why is churn important?
Churn is a critical element for success in a SaaS company. Being able to identify where there is attrition in your company is valuable insight for making improvements. Churn is used in or to:
Common Churn Metrics for Subscriptions Businesses
The rate at which you are losing MRR through downgrades and cancellations, offset by account expansions.
MRR Churn Rate = (Churn MRR + contraction MRR) – (expansion MRR + reactivation MRR)
MRR at start of period
Customer Lifetime Value is an estimate of the projected total value of a customer over its lifetime (from sign-up to churn).
CLV = ARPC x gross margin %
Customer churn rate
ARPC = Average Revenue Per Customer
Gross margin is the difference between revenue and cost of goods sold. Non-recurring revenues are excluded.
Why is CLV important?
When you’re considering the direction your company is taking, the lifetime value of a user is one of the most important metrics to understand.
Different lifetime value models can inform decisions like how much you can pay to acquire a user, the effects of losing users, and how changes to a product affect the sum-total revenue you can expect to bring in from a user.
It’s also an easy metric to look at in order to see the overall health of a product in terms of both revenue and customer retention. A growing LTV means a company is doing well—customers are happy and will be giving you more money over the life of your relationship.
On the other hand, a declining LTV means that a company is getting less money out of each customer it brings in and needs to fix something fast. It includes
Customer Acquisition Cost is the cost associated in convincing a customer to buy a product/service. This cost is incurred by the organization to convince a potential customer.
This cost is inclusive of the product cost as well as the cost involved in research, marketing, and accessibility costs. This is an important business metric.
Why is CAC important?
The cost of customer acquisition as an important measure in evaluating how much value customers bring to their businesses. Companies and organizations need to get a return on investment (ROI) from marketing and sales campaigns geared toward customer acquisition. The goal is to achieve a high lifetime value (LTV) to CAC ratio. A 3:1 LTV:CAC ratio is an ideal target.
Using appropriate customer acquisition strategies helps companies to grow, and targeted customer acquisition programs help companies acquire the right customers in a cost-effective way.
An estimate of the cost to acquire a customer
CAC = all sales and marketing expenses
# of customers added
The CAC is determined by dividing the total costs associated with acquisition by total new customers, within a specific time period.
