As a SaaS entrepreneur, there are countless numbers, statistics, and metrics that you need to track and calculate to assess the health of your business, but the sheer number of acronyms can be overwhelming. In this six-part series on key SaaS metrics, we’ll walk you through the most common—and helpful—metrics you need to know to successfully run and grow your SaaS business. 

One of the most important metrics you should be tracking in a subscription-based SaaS business is your ongoing revenue from those subscriptions, so this week’s post will focus on monthly recurring revenue (MRR).

 

What is MRR?

As the name suggests, MRR measures the monthly amount of total revenue that is subscription-based or recurring in nature and highly likely to continue into the future. This number excludes all one-time, nonrecurring payments, such as implementation, professional service fees or hardware, as well as one-time discounts.

 

Why MRR is important

There’s a reason MRR is one of the biggest buzzwords in the SaaS startup world—and why it’s tracked so closely. While growth in bookings is the revenue performance standard for traditional industry, using bookings to measure growth in SaaS businesses is misleading and easily manipulated. This is because subscription terms can vary wildly—from month-to-month contracts to multi-year contracts—and once you factor in upgrades, downgrades, and renewals over a contract term, it becomes pretty difficult to understand the true performance of a company using just bookings. What MRR does is normalize that recurring revenue into a fixed time period, providing an accurate benchmark for your business momentum.

Successful SaaS companies track their MRR to measure their growth and momentum. It’s also key for financial forecasting and planning.

As a key indicator for growth, measuring your MRR on a month-over-month basis is critical for understanding whether you’re gaining traction or starting to stall.

For financial planning purposes, MRR is particularly helpful since it’s relatively stable and predictable. Once you have a history of tracking your MRR, you can use it to model out estimates of where you’ll be in the coming months and can plan your business accordingly. However, remember that MRR does not represent your actual cash flow. If you’re receiving all of your money upfront, you need to keep in mind that you’ll still be incurring costs to service that contract over the rest of its term, without receiving any additional cash inflow.

 

How to calculate MRR

To calculate your MRR, start by totaling the monthly subscription values of each of your current customers. If you have customers that are on multi-month subscriptions, simply take those contract values and divide by the number of months in the subscription period.

For clarity, here’s an example. Say you have 20 customers with half on your basic plan priced at $10/month and the other half on your premium plan at $120/year that pays all upfront. Your MRR would be (10 x $10) + (10 x $120/12) = $200.

Your total revenue for that month may have been significantly different from $200 if you have any nonrecurring payments, such as one-time installation fees for new customers or additional charges on top of the monthly contract value for usage or data overages. That’s because MRR is not trying to measure cash flow or receipts, but how quickly and efficiently you’re growing your topline.

Want more metrics?

Download our guide, The 8 SaaS Metrics that Matter, to learn more about calculating metrics and using them to quantify your company’s successes for investors.

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