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What is Monthly Recurring Revenue (MRR)?

What is Monthly Recurring Revenue (MRR)?

There's one metric that is a cornerstone for subscription-based companies: Monthly Recurring Revenue, or MRR.

 

But what exactly is MRR, and why is it so important?

Definition: Monthly Recurring Revenue - often referred to in the abbreviated acronym 'MRR' - signifies the total (predictable) revenue a business can expect on a monthly basis from its subscribers / customers. This doesn't just apply to traditional subscriptions but spans across software services, memberships, and digital platforms.
 

Importance in SaaS and Subscription Models:

For SaaS (Software as a Service) businesses and subscription models, MRR provides a lense to the company's growth (and health). It gives insights on revenue streams, customer loyalty, and potential financial forecasts.
 

MRR vs. One-time Sales:

Unlike one-time sales, MRR reflects consistent and predictable income, thereby offering a clearer picture of long-term sustainability and business stability (it's why many investors prize subscription businesses so highly).
 

Types of MRR:
 

  • New MRR: Revenue from new customers acquired.

  • Expansion MRR: Additional revenue from existing customers, usually through up-sell or cross-sell.

  • Churned MRR: Revenue lost when a customer unsubscribes or downgrades.

  • Reactivation MRR: Revenue regained from returning customers.
     

OK, so how do I calculate MRR?

 

MRR can be calculated by multiplying the number of paying customers by the average billed amount. 

(Number (#) of paying customers X Average billed amount (£/$))

Regularly monitoring this metric and by understanding MRR, businesses can pinpoint areas of growth, areas that need attention, and tailor their marketing and operational strategies.

MRR as a Key Performance Indicator (KPI):

MRR acts as a pivotal KPI for SaaS businesses, guiding them in making informed decisions, strategising expansions, and in investor relations (both existing and prospective).

The Role in Customer Lifetime Value (CLV):

MRR, when paired with metrics like Customer Acquisition Cost (CAC), helps in calculating the Customer Lifetime Value, a critical aspect for businesses to understand their profitability per customer.

Impact on Business Valuation:

When businesses look for investors or consider mergers and acquisitions, MRR becomes a significant factor in determining the company's valuation.

Beyond Revenue:

Customer Relationships: MRR isn't just about revenue; it's a reflection of customer trust and relationship with the brand. A steady or growing MRR indicates strong customer relations, loyalty, and satisfaction.

In conclusion, Monthly Recurring Revenue isn't just a metric; it's a way of taking the pulse of subscription-based businesses, providing invaluable insights and guiding growth.

 

It's one of the reasons we ask for this question for companies signing up to use shipshape.vc

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