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Estd 4.22.2023
In the fast-paced world of SaaS, tracking the right metrics is essential for sustainable growth and investor confidence. Among these metrics, Monthly Recurring Revenue (MRR) stands as perhaps the most fundamental indicator of business health and trajectory. For SaaS executives, understanding MRR isn't just about monitoring a number—it's about gaining a comprehensive view of your business's stability, growth potential, and overall health.
What is Monthly Recurring Revenue (MRR)?
Monthly Recurring Revenue is the predictable, subscription-based revenue that a company expects to receive every month. Unlike one-time purchases, MRR represents the normalized monthly revenue from all active subscriptions, providing a standardized view of recurring income regardless of varying billing cycles or subscription terms.
MRR encompasses:
- Revenue from new customers who subscribed in the current month
- Continued revenue from existing subscribers
- Additional revenue from existing customers who upgraded their plans (expansion MRR)
- Less the revenue lost from customers who downgraded (contraction MRR) or canceled their subscriptions (churned MRR)
For example, if a customer pays $1,200 annually for your software, their contribution to MRR would be $100 ($1,200 ÷ 12).
Why is MRR Critically Important for SaaS Companies?
1. Predictable Business Model
MRR provides predictability in an otherwise uncertain business landscape. According to a McKinsey report, companies with predictable revenue streams are valued 8x higher than those with less predictable models. This predictability allows for more accurate forecasting, budgeting, and strategic planning.
2. Valuation Driver
For SaaS executives considering funding or exit strategies, MRR is a key valuation metric. Venture capitalists and potential acquirers typically value SaaS businesses at a multiple of their MRR—often ranging from 4x to 10x annual recurring revenue, depending on growth rates, market conditions, and other factors.
3. Cash Flow Management
Understanding your MRR helps optimize cash flow management. As Jason Lemkin, founder of SaaStr, notes: "Recurring revenue is the ultimate cash flow tool because it allows you to invest ahead of revenue with minimal risk."
4. Growth Indicator
MRR growth rate serves as a real-time indicator of business trajectory. According to KeyBanc Capital Markets' SaaS survey, top-performing SaaS companies maintain year-over-year MRR growth rates of 40% or more.
5. Business Health Barometer
MRR components—especially expansion, contraction, and churn—provide insights into customer satisfaction, product-market fit, and overall business health.
How to Measure MRR Effectively
Calculating basic MRR is straightforward:
MRR = Sum of all monthly recurring revenue from customersHowever, for a comprehensive view, SaaS executives should break down MRR into its components:
1. New MRR
This represents revenue from new customers acquired in the current month.
New MRR = Number of new customers × Average revenue per new customer2. Expansion MRR
This captures additional revenue from existing customers who upgraded their plans or purchased add-ons.
Expansion MRR = Sum of all additional recurring revenue from existing customers3. Contraction MRR
This reflects revenue lost from customers who downgraded their subscriptions.
Contraction MRR = Sum of all lost recurring revenue from customers who downgraded4. Churned MRR
This represents revenue lost from customers who canceled their subscriptions.
Churned MRR = Sum of all lost recurring revenue from customers who canceled5. Net New MRR
This provides a holistic view of MRR changes.
Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churned MRR6. Net MRR Retention Rate
This indicates how well you retain and grow revenue from existing customers.
Net MRR Retention Rate = (Starting MRR + Expansion MRR - Contraction MRR - Churned MRR) ÷ Starting MRR × 100%A rate above 100% indicates that growth from existing customers exceeds losses from churn and downgrades—a strong indicator of product-market fit and customer satisfaction.
Advanced MRR Metrics for Executive Decision-Making
Beyond basic calculations, sophisticated SaaS executives track:
MRR Growth Rate
MRR Growth Rate = (Current Month MRR - Previous Month MRR) ÷ Previous Month MRR × 100%According to OpenView Partners' SaaS Benchmarks Report, top-quartile early-stage SaaS companies achieve monthly MRR growth rates of 10-15%.
MRR Churn Rate
MRR Churn Rate = Churned MRR ÷ Starting MRR × 100%Industry benchmarks suggest healthy SaaS companies should maintain monthly churn rates below 2%.
Average Revenue Per User (ARPU)
ARPU = Total MRR ÷ Total Number of CustomersTracking ARPU trends helps identify opportunities for revenue optimization.
Lifetime Value (LTV) to Customer Acquisition Cost (CAC) Ratio
LTV = ARPU ÷ Churn RateLTV:CAC Ratio = LTV ÷ CACSuccessful SaaS companies typically maintain an LTV:CAC ratio of at least 3:1.
Implementing Effective MRR Tracking
1. Leverage Purpose-Built Tools
Most SaaS companies use dedicated analytics platforms such as ChartMogul, ProfitWell, or Baremetrics to automate MRR calculations and visualize trends.
2. Normalize Different Billing Frequencies
Ensure your MRR calculations properly normalize different subscription terms. For quarterly, semi-annual, or annual subscriptions, divide the total contract value by the number of months.
3. Establish Clear Definitions
Maintain consistent definitions for MRR components across your organization to ensure accurate reporting and analysis.
4. Set MRR Growth Targets
Benchmark your MRR metrics against industry standards and set realistic growth targets. According to SaaS Capital, the median annual growth rate for SaaS companies with $1-10M in ARR is approximately 35%.
5. Create MRR Dashboards for Different Stakeholders
Develop tailored dashboards for different teams:
- Executive leadership: Overall MRR growth, net retention rates, and trends
- Sales: New MRR and expansion MRR by segment
- Customer success: Churn MRR and contraction MRR by customer cohort
- Product: MRR impact of new features or pricing changes
Common MRR Calculation Pitfalls to Avoid
1. Including Non-Recurring Revenue
One-time setup fees, professional services, or implementation fees should be excluded from MRR calculations.
2. Improper Handling of Discounts
Temporary discounts should not affect MRR calculations if they don't change the underlying subscription value.
3. Ignoring Contract Terms
Multi-year contracts paid upfront should be normalized to their monthly equivalent rather than counted as a single large MRR addition.
4. Failing to Segment MRR
Not breaking down MRR by customer segment, plan type, or acquisition channel can mask important trends.
Conclusion: Making MRR Your Strategic Compass
Monthly Recurring Revenue is more than just a financial metric—it's a strategic compass that guides SaaS executives through critical business decisions. By meticulously tracking MRR and its components, you gain invaluable insights into your company's growth trajectory, customer satisfaction, and overall business health.
In today's competitive SaaS landscape, companies that master MRR measurement and optimization build more resilient, valuable businesses. They make more informed decisions about resource allocation, identify growth opportunities earlier, and create more predictable paths to sustainable growth.
For SaaS executives, the question isn't whether to track MRR, but rather how to leverage this critical metric to drive strategic advantage. By implementing robust MRR tracking systems and regularly analyzing MRR trends, you'll position your company for success in both bull and bear markets.