.png)
Estd 4.22.2023
In the dynamic world of Software as a Service (SaaS), one metric reigns supreme as the heartbeat of your business health: Monthly Recurring Revenue (MRR). As a SaaS executive, understanding how to accurately calculate and leverage MRR isn't just a financial exercise—it's the compass that guides strategic decision-making and signals your company's growth trajectory to investors and stakeholders.
Why MRR Matters More Than You Think
Monthly Recurring Revenue represents the predictable revenue stream your business generates each month from subscription customers. Unlike one-time purchases, MRR provides visibility into future cash flows, creating a foundation for sustainable growth planning. According to OpenView Partners' 2023 SaaS Benchmarks report, companies with strong, consistent MRR growth secure valuations 2-3x higher than those with more volatile revenue patterns.
As David Skok, renowned SaaS investor, notes: "MRR is the lifeblood of a subscription business. It allows founders to forecast growth, plan hiring, and ultimately communicate value to investors with confidence."
The Basic MRR Calculation Formula
At its core, calculating MRR follows a straightforward formula:
MRR = Sum of all paying customers' monthly subscription value
For example, if you have:
- 10 customers paying $100/month
- 15 customers paying $200/month
- 5 customers paying $500/month
Your MRR calculation would be:
(10 × $100) + (15 × $200) + (5 × $500) = $1,000 + $3,000 + $2,500 = $6,500
However, for most SaaS businesses, the calculation requires more nuance to account for various pricing models and customer behaviors.
Advanced MRR Components You Need to Track
1. New MRR
New MRR represents revenue from newly acquired customers. Tracking this separately helps measure the effectiveness of your acquisition strategies.
New MRR = Sum of monthly subscription value from new customers
2. Expansion MRR
Expansion MRR comes from existing customers who upgrade their plans or purchase additional services.
Expansion MRR = Increase in monthly subscription value from existing customers
This metric is particularly valuable as it reflects your product's ability to deliver increasing value over time. According to ProfitWell research, companies with strong expansion MRR (15%+ of total MRR growth) tend to achieve 50% higher growth rates than those focusing primarily on new customer acquisition.
3. Contraction MRR
Contraction MRR occurs when existing customers downgrade their subscriptions.
Contraction MRR = Decrease in monthly subscription value from existing customers who downgrade
4. Churn MRR
Churn MRR represents lost revenue from customers who cancel their subscriptions entirely.
Churn MRR = Sum of monthly subscription value from cancelled accounts
5. Net New MRR
This holistic metric captures your overall MRR movement:
Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churn MRR
Handling Special Cases in MRR Calculations
Annual Subscriptions
For customers who pay annually, divide the total annual subscription value by 12:
Monthly value of annual subscription = Annual subscription value ÷ 12
For instance, a $1,200 annual plan would contribute $100 to your monthly MRR.
One-Time Fees
One-time fees like setup costs or implementation fees should be excluded from MRR calculations as they don't recur. Track these separately as non-recurring revenue.
Usage-Based Pricing Components
For hybrid pricing models with usage-based components, calculate the predictable base subscription as MRR, and track usage revenue separately as variable MRR based on trailing averages.
Building Your MRR Dashboard: A Step-by-Step Approach
Segment by customer cohorts: Group customers by acquisition month to track MRR retention and expansion over time.
Track MRR velocity: Measure the rate of MRR growth month-over-month to identify acceleration or deceleration trends.
Monitor MRR efficiency: Calculate your CAC (Customer Acquisition Cost) payback period by dividing customer acquisition cost by monthly MRR per customer.
Visualize MRR bridges: Create waterfall charts showing how your starting MRR transitions to ending MRR through new, expansion, contraction, and churn components.
Jason Lemkin, founder of SaaStr, recommends displaying these metrics on a dedicated "MRR dashboard" that executives review weekly. "The companies that obsess over their MRR components tend to grow 2x faster than those who only look at top-line revenue," Lemkin observes.
Common MRR Calculation Pitfalls to Avoid
Including non-recurring revenue: Mixing one-time payments with recurring revenue distorts MRR calculations and future projections.
Ignoring discounts: Temporary promotions should be normalized to reflect the actual long-term revenue expectation.
Improperly handling annual contracts: Recognize revenue consistently by amortizing annual contracts over 12 months.
Neglecting currency conversion: For businesses with international customers, standardize all calculations to a single currency to avoid exchange rate fluctuations affecting MRR trends.
Leveraging MRR Data for Strategic Decision-Making
Beyond tracking, your MRR metrics should inform key business decisions:
Product development: Analyze expansion MRR to identify which features drive upsells and prioritize similar enhancements.
Customer success investments: Compare retention rates across customer segments to allocate resources where churn risk is highest.
Sales strategy refinement: Evaluate which customer profiles generate the highest MRR over time to refine your ideal customer profile.
Fundraising timing: Use MRR growth rates to determine optimal timing for raising capital, as accelerating MRR growth typically maximizes valuation.
Conclusion: MRR as Your North Star Metric
Mastering MRR calculation isn't just about tracking numbers—it's about creating a data-driven culture that prioritizes sustainable growth. By breaking down MRR into its constituent parts and tracking them diligently, you'll gain unprecedented visibility into your business health and future trajectory.
The most successful SaaS companies don't just passively monitor MRR; they actively optimize each component through intentional product, marketing, and customer success strategies. As you refine your approach to calculating and leveraging MRR, you'll be equipped to make more confident decisions, allocate resources more effectively, and ultimately build a more valuable SaaS business.
To take your MRR analysis to the next level, consider implementing cohort analysis to understand how retention and expansion behaviors evolve throughout the customer lifecycle—a practice that separates truly data-driven SaaS leaders from the competition.