MRR for a SaaS company: How to calculate monthly recurring revenue

New sales for B2B SaaS companies have dramatically improved, up 20% from December 2023's two-year low point. This surge in sales activity signals renewed growth in the SaaS market, making it crucial for businesses to effectively track and analyze their MRR.

This article provides a complete guide to MRR, a key metric for understanding your SaaS business's financial health and growth trajectory.

Read on to learn:

• What MRR is and why it matters
• The different types of MRR
• How MRR compares to other SaaS metrics
• Best practices for accurate MRR reporting
• A step-by-step guide on how to calculate MRR
• How to use MRR for financial forecasting and business planning
• The role of MRR in evaluating product-market fit and customer retention

So, we know that MRR is important, especially in the SaaS industry. But what does MRR stand for? Let’s start by answering that question and explaining what’s the role of MRR in SaaS. 

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What is MRR in the SaaS world?

MRR stands for monthly recurring revenue. It’s like a financial health check that tells you how much recurring revenue you can expect to bring in each month. 

It’s a reliable revenue stream coming from your loyal subscribers. This recurring revenue is the heart of the SaaS business model, providing stability and predictability.

Why is MRR so important?

The MRR meaning in the SaaS world goes beyond a simple revenue number. It's a key performance indicator (KPI) that helps you understand your business's growth trajectory and overall financial well-being. 

What is MRR in business? In essence, it's a measure of your predictable revenue, giving you a clear picture of your financial performance. This visibility allows you to:

• Track growth: MRR helps you monitor how your business is growing month over month.
• Predict future revenue: By analyzing MRR trends, you can forecast your future earnings.
• Make informed decisions: MRR data can guide your decisions on pricing, customer acquisition, and churn reduction.

MRR provides valuable insights into the health of your business, making it an indispensable tool for any SaaS company. 

Why MRR matters for SaaS growth

MRR in SaaS is your map for navigating the world of subscription-based business. It's a key that unlocks informed decision-making and sustainable growth. Let's explore the "why" behind its importance.

Financial forecasting and business planning

MRR is like your financial heartbeat. It gives you a pulse on your revenue streams, allowing you to anticipate future performance with a degree of confidence that other business models simply can't achieve. 

This predictability is very valuable for making informed decisions about the future of your business.

Need to secure funding? MRR helps you paint a compelling picture of your financial health for potential investors, along with supporting metrics like CAC (Customer Acquisition Cost) or LTV (Lifetime Value). Planning to expand your team or launch a new marketing campaign? MRR data empowers you to make strategic budgeting decisions and allocate resources wisely.

Product-market fit and customer retention

MRR is also a reflection of how well your product resonates with your target audience. Consistent MRR growth is a strong signal that you've found a product-market fit. It’s that sweet spot where your solution meets a real need in the market.

MRR is also your co-pilot for customer retention. By keeping a close eye on MRR trends, you can find potential churn risks before they become full-blown problems. Is your MRR taking a dip? That could be a warning sign that some customers aren't getting the value they expect.

MRR helps you understand the long-term value of your customers too. By analyzing MRR data, you can spot your most valuable customer segments. Then, you can tailor your retention strategies accordingly. 

This tailoring process could involve personalized onboarding, proactive support, or exclusive loyalty programs.

MRR can provide key insights into which features or pricing plans are driving the most value for your customers. This information can guide your product development roadmap. It can also help you prioritize features that will have the biggest impact on customer satisfaction and retention.

Remember: MRR is much more than a financial metric. By understanding and leveraging MRR, you can navigate the complexities of the SaaS landscape. Monitoring your MRR in SaaS helps you build a loyal customer base and achieve long-term success.

Types of MRR in SaaS

MRR in SaaS isn't just a single, monolithic figure. To truly understand your revenue streams, you need to break it down into its different components. Think of these MRR types as different ingredients in a recipe — each one contributes to the overall success of your business.

Let’s get started with our breakdown of the most common types of MRR in SaaS:

New MRR

New MRR is one of the most important types of MRR for your SaaS business. It represents the fresh revenue generated from brand-new customer subscriptions each month. Essentially, it's a measure of how effectively you're attracting and converting new customers.

Example:

Imagine your SaaS startup activates up to ten new customers in June. Let’s say each customer subscribes to your "Basic" plan at $50 per month. Your new MRR for June would be ten customers x $50/month = $500.

Expansion MRR

Expansion MRR is the revenue boost you get from your current customers when they decide to spend more. They could be spending more because of upsells (moving to a higher-priced plan), cross-sells (purchasing extra features), or upgrades (adding more users or "seats" to their plan). 

Expansion MRR is a testament to your ability to provide ongoing value and nurture your customer relationships.

Example:

Let's say 5 of your customers on the $50/month "Basic" plan decide to upgrade to the $100/month "Premium" plan in July. Your expansion MRR for July would be five customers x ($100-$50)/month = $250.

Contraction MRR

Contraction MRR is the flip side of expansion MRR. It's the revenue you lose when existing customers downgrade their subscriptions or reduce their usage. 

This process could involve moving to a lower-priced plan or reducing the number of users. While not as dramatic as churn, contraction MRR still impacts your bottom line and warrants attention.

Example:

Let’s say two of your customers on the $100/month "Premium" plan decide to downgrade to the $50/month "Basic" plan in August. In this case, your contraction MRR for August would be two customers x ($100-$50)/month = $100.

Churned MRR

Churned MRR is the inevitable, yet often unfortunate, reality of SaaS. It's the revenue lost due to customers canceling their subscriptions altogether. 

Churn is a natural part of the SaaS lifecycle. Keeping a close eye on churned MRR is vital for understanding customer retention and finding areas for improvement.

Example:

Imagine three of your " customers, each paying $50/month, decide to cancel their subscriptions in September. If that happens, your churned MRR for September would be three customers x $50/month = $150.

By understanding these different types of MRR, you gain a more nuanced view of your revenue streams. This bird’s-eye view can help you make more informed decisions to drive sustainable growth for your SaaS business.

MRR vs. other SaaS revenue metrics

MRR in SaaS is a vital metric, but it's not the only one that matters. It's helpful to understand how MRR relates to other key SaaS revenue metrics and when each one is most relevant. Let's explore some of these comparisons.

MRR vs. ARR (annual recurring revenue)

MRR and ARR are different lenses through which you can view your SaaS revenue. MRR provides a close-up view, giving you a detailed picture of your monthly recurring revenue. ARR offers a wider-angle perspective, encompassing your annual recurring revenue.

MRR is particularly useful for early-stage companies and those who need to closely monitor month-to-month changes. It allows you to spot trends, find potential issues, and react quickly to fluctuations.

ARR is a much broader view. It is often favored by mature businesses and those focused on long-term planning and forecasting. It provides a sense of your overall revenue trajectory and helps you set annual goals.

MRR vs. Bookings

Both MRR and bookings provide valuable information about your revenue. However, they shouldn't be confused or considered synonyms. 

Bookings represent the total value of all contracts signed in a given period, regardless of whether the payment is upfront or recurring. MRR, however, focuses solely on the recurring portion of that revenue, normalized to a monthly value.

For analyzing monthly trends, MRR is generally more reliable than bookings. Bookings can fluctuate a lot depending on when large contracts are signed. 

MRR, on the other hand, offers a smoother and more consistent picture of your monthly performance. This key difference makes MRR a more accurate reflection of your underlying revenue growth.

MRR for short-term insights & ARR for long-term planning

MRR and ARR work best in tandem, providing a complete view of your SaaS revenue. MRR excels at providing short-term insights. It allows you to monitor your monthly performance, analyze revenue segments, and make tactical adjustments as needed.

ARR, with its focus on the bigger picture, supports long-term planning and strategic decision-making. It helps you set ambitious yet attainable annual targets and forecast future growth based on historical trends. It also helps you make strategic investments in areas like product development or market expansion.

Best practices for accurate MRR reporting

MRR in SaaS is a powerful metric, but its power hinges on accuracy. Think of it like building a house: a solid foundation is essential for a stable structure. Here are some best practices to ensure your MRR reporting is accurate and insightful:

Regular audits and reconciliations

Just like a car needs regular tune-ups, your MRR data needs periodic check-ups to make sure everything is running smoothly. Regularly audit your MRR calculations and reconcile them with your accounting records. 

This approach helps catch any discrepancies or errors that might creep in and guarantees your MRR reporting is always reliable.

Separate recurring revenue from one-time payments

MRR is all about recurring revenue. Be diligent about separating recurring subscription payments from one-time fees, such as setup fees or professional service charges.

Including these one-time payments in your MRR calculations is a definitive no-go. Why? Because doing so can inflate your numbers and distort your view of true recurring revenue.

Segment MRR by customer type

Not all customers are created equal. Segmenting your MRR by customer type (e.g., small and medium-sized business, mid-market, enterprise) can unlock valuable insights. 

This discrete separation allows you to understand which customer segments are driving the most revenue. This approach can also help you identify areas for growth and tailor your strategies accordingly.

Account for discounts and coupons

Discounts and coupons impact your MRR, so it's crucial to account for them accurately. Don't just use the list price; factor in any discounts or promotions to reflect the actual revenue you're receiving. 

Going with this approach helps ensure your MRR reporting provides a true picture of your financial performance.

Track and analyze MRR churn

By diligently tracking and analyzing your churned MRR, you can identify patterns and take proactive steps to reduce customer churn. 

This process might involve improving your onboarding process and offering more proactive support. In some cases, the process might also require you to revisit your pricing strategy.

Use a consistent methodology

Consistency is key for accurate MRR reporting. Establish a clear and consistent methodology for calculating and reporting your MRR. 

Document your assumptions and confirm everyone involved in the process understands and follows the same guidelines. A consistent methodology helps avoid confusion and guarantees everyone is on the same page.

How to calculate MRR

Calculating MRR in SaaS is crucial for understanding your revenue growth, but it's important to do it accurately. Here's a step-by-step guide to help you calculate your MRR, with clear explanations, examples, and formulas:

Step 1: Identify your recurring revenue streams

Begin by clearly identifying all the sources of recurring revenue for your SaaS business. These typically include:

• Monthly subscriptions: The foundation of most SaaS revenue models.
• Annual subscriptions: Often offered at a discounted rate compared to monthly subscriptions.
• Recurring add-ons: These could be extra features, usage-based charges, or support services.

Important note: Remember to exclude any one-time payments, such as setup fees or consulting services, from your MRR calculations.

Step 2: Normalize subscriptions to a monthly value

MRR, as the name implies, focuses on monthly recurring revenue. Therefore, if you have customers on annual or quarterly plans, you'll need to normalize their subscriptions to a monthly value.

Formula for normalizing annual subscriptions:

Monthly MRR = Annual Subscription Value / 12

Example:

If a customer pays $1,200 annually for your service, their monthly MRR would be $1,200 / 12 = $100.

Step 3: Factor in customer-specific pricing

Not every customer pays the same price. To ensure your MRR calculations are accurate, it's crucial to consider any customer-specific pricing adjustments. This includes:

• Discounts: Account for any discounts offered to customers, whether promotional, volume-based, or part of a special agreement.
• Coupons: If you use coupons as part of your marketing strategy, make sure to factor in the discounted price the customer actually pays.
• Custom pricing: If you have customers on custom pricing plans, be sure to use their specific pricing details in your MRR calculations.

By considering these customer-specific pricing variations, you can make sure your MRR calculations accurately reflect the actual revenue you're getting. This approach provides a more precise and reliable foundation for your revenue analysis and forecasting.

Step 4: Calculate MRR for each customer

Once you've normalized subscriptions and accounted for discounts, you can calculate the MRR for each customer.

Formula for calculating individual customer MRR:

Customer MRR = (subscription price - discounts) / billing cycle (in months)

Example:

A customer on a quarterly plan priced at $300 with a 10% discount would have an MRR of ($300 x (1-0.10)) / 3 = $90.

Step 5: Sum up individual customer MRR

To determine your total MRR, simply add up the MRR for all your customers.

Formula for Calculating Total MRR:

Total MRR = Σ (customer MRR) 

Example:

If you have 100 customers with an average MRR of $50, your total MRR would be 100 x $50 = $5,000.

Step 6: Track MRR over time

Calculating your MRR for a single month is just the starting point. To gain a complete understanding of your business's growth, you need to track your MRR over time. Doing so will reveal trends, highlight potential challenges, and inform your strategic decisions.

Step 7: Don't forget about MRR components

Remember the different types of MRR we discussed earlier? Tracking these components provides valuable insights into the factors driving your MRR growth.

Formulas for calculating MRR components:

• Net new MRR: New MRR + Expansion MRR - Churned MRR - Contraction MRR
• Expansion MRR: (MRR at the end of the month) - (MRR at the beginning of the month) - (New MRR) + (Churned MRR)

By considering these customer-specific pricing variations, you can ensure your MRR calculations accurately reflect the actual revenue you're getting. You’re getting a more precise and reliable foundation for your revenue analysis and forecasting.

Orb can help track your MRR effectively

We've explored the critical role of MRR in SaaS, from explaining its different types to ensuring accurate calculation. Effectively tracking and analyzing MRR can be a challenge, especially as your business scales. 

That's where Orb comes in.

Orb is a done-for-you billing platform. It simplifies the complexities of billing, freeing you to focus on building a thriving product and delighting your customers.

Here's how Orb can help you track your MRR effectively:

• Automated financial metrics: Orb helps calculate your MRR, taking into account various pricing models, discounts, and billing cycles. This eliminates manual effort and reduces the risk of errors.
• Real-time MRR reporting: Get instant visibility into your financial  performance with Orb's real-time dashboards and reports. Track your revenue trends, identify growth drivers, and spot potential issues proactively.
• Granular MRR segmentation: Segment customer type, plan, or any other attribute to gain deeper insights into your revenue streams. We help you identify your most valuable customer segments and tailor your strategies accordingly.
• Accurate revenue recognition: Orb ensures accurate revenue recognition, even with complex pricing models and billing scenarios. This feature simplifies compliance with accounting standards and provides a clear picture of your financial performance.
• Integrations: Integrate Orb with your existing tools. Think CRM, payment gateways, and accounting software. By doing so, Orb helps you simplify your billing and reporting processes.

Ready to take control of your SaaS billing and unlock your growth potential? Discover how Orb can help you achieve scalable, sustainable growth. Test our free 30-day trial and experience Orb yourself. Make sure to also check our flexible pricing options and find your ideal plan.