MRR: What is it and how to calculate the metric?

MRR: What is it and how to calculate the metric?

MRR is a term that originates in English and means Monthly Recurring Revenue. Its calculation is based on what customers pay companies monthly for their service subscriptions.

Is this, however, something new to you?

New or not, the truth is that many companies adopt this metric in their business. Especially SaaS companies.

This is a very valuable indicator for organizations. Its concept and its calculation need to be fully understood by entrepreneurs who, in their businesses, sell recurring services.

More than that. It is necessary to be clear and also to pursue ways to increase the MRR daily.

After all, this is a safe way for companies to grow and become increasingly a reference in the area in which they operate.

Do you know what MRR is and how to increase it? Then check out this article.

Let’s go.

Good reading!

 

What is MRR?

The MRR or Monthly Recurring Revenue, is an essential metric for companies that work with subscriptions, whether services (the most common) or products.

This metric represents the expected monthly revenue from existing contracts, given the value and number of active customers.

By tracking MRR, you can more accurately measure revenue inflows, as well as plan renewals, upsells, and cancellations – also known as churn.

In addition, it also helps you make more accurate decisions about where to invest to maximize trading results.

In summary, the MRR works as a “bridge” between the financial and strategic areas.

 

What is the difference between ARR and MRR?

The ARR (Annual Recurring Revenue) and the MRR (Monthly Recurring Revenue) are two different metrics, but equally important for companies that work with recurring revenue.

As you already know, MRR is the monthly recurring revenue a company expects to earn from its active customers.

The ARR is an estimate of the total revenue the company expects to earn over a year.

To calculate the ARR, you must consider existing subscriptions as well as the number of new customers you expect to acquire that year.

But remember that it’s difficult to accurately measure annual recurring revenue, after all, many things can happen over a year.

ARR = (Existing Customers Monthly Subscriptions x 12) + (New Customers Monthly Subscriptions x 12).

 

What are the types of MRR?

Did you know that MRR can be measured from multiple perspectives?

In total, there are 5 different types of MRR, which can be applied to any company, regardless of size.

To help you understand better, we explain below each of the types of MRR, their formulas, and applications. Check out!

 

NMRR

The NMRR, also known as New Monthly Recurring Revenue, measures the recurring revenue generated by new customers in a given period.

This type of MRR makes it possible to measure the effectiveness of your marketing and sales strategies, in addition to your company’s ability to increase its customer base over time.

Even working with a predictable model, it is important to continue attracting new customers to maintain the financial health of the business, after all, the constant loss can affect revenue in the long term.

NMRR = number of new clients x average value of the plan.

 

Reactivation MRR

The Reactivation MRR demonstrates the effectiveness of your customer retention strategies.

With the support of this metric, you can calculate the revenue generated by reactivating customers who have canceled their contracts.

You can also use it to discover behavioral patterns and, of course, plan new actions to bring more and more customers back.

Therefore, if you are looking to increase your customers’ satisfaction and, at the same time, your monthly recurring revenue, you need to closely monitor Reactivation MRR.

 

Reactivation MRR = number of reactivations in the period x average value of the plan.

 

Expansion MRR

Expansion MRR is used to measure the revenue generated by customers who upgrade their plans, either by upgrading to a more expensive version or adding other features to their subscriptions.

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When this happens, it means that the offered solution is generating value for the customer and, therefore, he is willing to pay more to obtain better benefits.

This type of MRR can also be useful for fine-tuning your pricing, upselling, and cross-selling strategies.

For example, if you notice that many customers are upgrading to a more expensive plan, you can do a price study to look for a possible increase.

 

Expansion MRR = number of customers who upgraded x (average value of new plan – average value of old plan).

 

Churn MRR

Churn MRR measures lost recurring revenue due to subscription cancellations.

When churn is high, the company loses not only the revenue that its customers are generating monthly but also the potential for future revenue that it could generate.

To prevent your business from suffering constant losses, it is important to closely monitor this metric and invest in actions to reduce churn and boost the generation of new revenue.

Several actions can help reduce churn, such as improving the customer experience, investing in personalized service, offering discounts to encourage subscription renewal, etc.

 

Churn MRR = (Current MRR – MRR of unsubscribed customers) / Initial MRR

 

Contract MRR

Unlike the Expansion MRR, the Contraction MRR indicates lost revenue due to downgrades, that is, customers who decided to migrate their packages to a cheaper version.

If your company usually loses revenue due to downgrades, it is important to assess the reasons that lead your customers to choose to reduce their plans.

Remember that a Contraction MRR can boost Churn MRR.

That said, we recommend following your Contraction MRR closely to apply improvements to your processes and resolve any issues that are impacting your customer’s experience.

 

Contraction MRR = number of customers who reduced the plan x (average value of the previous plan – average value of the current plan).

 

How to calculate the MRR?

But to understand how well the business is doing, you need to calculate monthly recurring revenue.

If monthly plans are being sold, the MRR can be calculated by taking the simple amount left by the customer each month.

But what if there is an annuity, for example? Let’s say that the user paid in advance for 12 months.

The calculation is still quite simple. Take the amount paid for the subscription and divide it by the number of months it will be valid.

Simple, right? Let’s take a practical example to make things easier.

Think of a company that has 10 customers who pay $20.5 a month. She has an MRR of $205. That’s because 10 x 20.50 = $205.

Let’s say 5 new customers join. They hire the most expensive subscription plan – which costs $51.30.

In this case, the MRR would go to $464.50. After all, the bill would be 10 x 20.50 + 5 x 51.30 = $464.50.

Easy, right?

 

But, attention!

When making this calculation, you need to pay attention to some items. Without this, the numbers can be unrealistic and this can harm the strategic planning of your business.

So look for questions like:

  • Deduct the discounts given from the calculation;
  • Deduct from the calculation the fees of the means of payment used;
  • Exclude one-time payments (people who will not remain with the company the following month);
  • Convert signatures in foreign currency to national currency;

What is the ideal MRR for companies?

It already exists – we can take parts of the previous topic and rewrite just the part about what is the ideal metric for companies.

There is no single MRR for all companies, after all, it depends on several factors: sector, business model, type of product or service offered, etc.

To arrive at an ideal MRR, you must analyze your company’s revenue generation history and take into account the potential of the market in which it operates.

If your company is inserted in a highly competitive market, you will certainly need to consider a higher MRR to remain competitive.

In a market with less competition, it is possible to work with a smaller MRR.

Generally speaking, your MRR should be greater than your lost revenue from subscription cancellations or downgrades.

 

What are the impacts of MRR and when is the metric ideal?

A less “chaotic” scenario, safer and with the possibility of envisioning the company’s growth.

This is one of the most positive impacts that MRR brings to those who sell subscriptions. It brings security in the day-to-day operations to know the sales forecast.

The task of how to retain customers is also much easier. After all, with a good follow-up of sales metrics, it is possible to identify when there is a greater number of churns.

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You may notice that this happens seasonally, for example, at the beginning of each year. Identifying this, companies can offer discounts for annuity payments as a way around the issue.

In addition, it is possible to know why in some months the billing goes up a lot and in others it drops a lot.

When it falls, the MRR gives the security of knowing what is the minimum that will enter the company’s cash every month. Based on this understanding, it is possible to act assertively at all times.

After all, in the worst-case scenario, you’ll know what you can’t do because your budget has already been adjusted and directed towards what the company operates today.

As for the “best of all worlds,” there is no set number or %.

The truth is the more subscriptions sold, the better. As long as, of course, the company can deliver quality to users.

 

Be prepared to grow

See well. Regarding the last sentence of the paragraph above. It is essential to maintain the quality of delivery that the company has while having fewer customers, at a time when this number is increasing.

Customer success is vital and simply cannot be overlooked. It structures a customer success sector well.

Have professionals focused on ensuring that users and/or subscribers are always satisfied.

It is necessary to have structure to keep the conquered customers and anticipate the possible churning.

 

How to increase MRR in your company?

Many efforts can be directed to increase the company’s MRR.

Inbound marketing campaigns are low-cost ways to drive more lead generation.

But this is not always something that improves commercial results in the short and medium term.

If there is a need for an immediate increase, it is necessary to act more incisively. And be clearer in the solutions taken.

Even if you prospect better, often the values ​​that come in fall short of expectations. Or distant from what is needed for the month.

Therefore, we separate 3 days on how to increase the amount received monthly with subscriptions.

Before we get into it, remember: with more clients, there are more responsibilities.

You need to have well-structured processes to avoid dissatisfaction and, consequently, always have people happy with your brand.

Let’s go to tips.

 

1 . Swap the free plan for the trial

The first step you can take is to stop offering a free subscription or plan.

Keeping it can be dangerous, as people can “get things done”.

They can adapt to the free plan and complement its use with some other external tool, for example.

If the idea is to attract customers by giving them part of the access to your service, why not adapt this strategy?

A good way out of this is to stipulate a trial period. And then it is not necessary to make part of the solution available (but if you want to do that, no problem).

In this test period, it leaves all the functionalities on display, available. But only for 15 days or one month whatever you will know this period better than anyone else.

During that time, build relationships with that prospect.

That is, send emails showing how the solution works. Share success stories. Show videos of the features in practice.

And start awakening in him a sense of urgency from the funneling time he has on trial.

If the experience is positive. If it is nourished with information that is worth signing, the sale will be that much closer.

Put the SDR in touch with this lead when the trial is over. Take questions with him and, in case of positive feedback, put the seller in contact with him.

More than that, shows that payment is facilitated. Hand him a discount code if it makes sense if the deal is stuck.

This makes much more sense than having users enjoy, for free, what took so much work to develop.

 

2 . Raise the price of what the company sells

It may seem like a lazy strategy to simply push the price higher. But, evaluating the context, the market, the competition, and the business persona, it can make sense, yes.

Before doing that, you need to know the value you generate for your users.

By having a good relationship with the customer, you can find out what your solution has brought them profit.

And, speaking with several, you measure and understand if the company is charging a price below what it could.

It is also possible to increase the price to follow in the footsteps of the competition or to obtain a higher value for investments.

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Test it out and see if your conversion rates have dropped, increased, or simply stagnated. If any of these last two occur, you will have made a correct decision, in theory.

 

3 . Create intermediate plans

It is always necessary to seek a balance between what is being paid by the customer x what is being supplied.

 

It is not uncommon for the seller, with the prospect on the other end of the line, to hear that the company even addresses his pain points, but the available plan has too many functionalities – useless to him – in addition to being very expensive.

For this, a good solution is to create intermediate plans. Not so basic (and cheap), but not so advanced (and expensive).

Or better yet, customizable signatures. Thus, the user assembles within a minimum value, the “package” he deems ideal. And you will pay according to the size of what you hired.

As a result, following these tips gets you that much closer to increasing MRR within your business.

But, remember: measure everything that is done. Use a good sales system to help you keep track of actions and, of course, always improve processes.

4 . Focus on Customer Centric

Customer-centric is a business approach that places the customer at the center of all company decisions and actions.

With this strategy, it is possible to deeply understand the needs and desires of customers, develop customized solutions, and align processes to exceed the expectations of its base.

If you follow our blog, you already know that a satisfied customer has greater potential to consume more with the company and indicate the solutions they use to other people, which can leverage the growth of MRR and the business as a whole.

That said, providing a positive experience from first contact to post-sales for your customers is undoubtedly one of the best ways to increase your MRR.

 

5 . Upselling

Upselling is when a company offers the customer a more complete version of the product or service that he uses or is considering purchasing.

This selling strategy can increase your MRR as it encourages the customer to spend more money to get more value or other benefits in return.

Upselling can be done at the time of contract renewal, but also throughout the customer’s lifecycle.

To discover the right moment to invest in this type of action, you must monitor the behavior of your base and identify the moment in which each client is.

 

Increase your MRR?

Do you want to increase your MRR and leverage your business growth, but feel that your sales processes are still not aligned?

To maximize your revenue, you need technology to support you.

Here are the right choices to achieve this goal, as they offer the best features to help you:

  • Identify additional sales opportunities;
  • Monitor the satisfaction of current customers;
  • Identify and resolve issues quickly to avoid lost revenue;
  • Automate processes and tasks that consume a lot of time for the commercial team;
  • Analyze all metrics related to your recurring business.

Did you like it? Get in touch with our experts and start transforming your business.

 

Conclusion

If you’ve made it this far, you already know that MRR is a very relevant metric for companies that have business models based on recurring revenue.

Calculating the MRR is not a difficult task, however, you need to develop the habit of following it frequently to measure the performance of your strategies and detect possible problems.

If you already calculate the MRR but want to increase it, follow our best practices and invest in new actions to also increase the NMRR and the Expansion MRR.

Do you have any questions about the article or do you want to understand the role of technology in increasing MRR? Talk to a consultant today.

Enjoy and read two articles that will certainly help you in your work routine.

The first brings some sales techniques that can be applied in any type of negotiation. The second addresses some good practices in customer service.

See you in the next article! Good sales!

 

FAQ – Frequently Asked Questions

Questions about MRR.

 

What is MRR?

MRR or Monthly Recurring Revenue is a metric used to measure the recurring revenue that a company receives from its customers. It is quite common in businesses that work with subscriptions and plans.

 

How to calculate recurring revenue?

To calculate recurring revenue, you must multiply the monthly recurring revenue per customer by the total number of customers.

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