Everything You Need To Know About Monthly Recurring Revenue

By April 18, 2020 April 20th, 2020 Sales

Assessment is crucial for any business hence why Measuring performance is important to the success of your business; Monthly Recurring Revenue (MRR) is one of the metrics you need to measure the performance of your business.

 

 

Performance of the business isn’t just about the business owner but everyone who is incorporated into the business including managers, sales leaders, and sales representatives.  To measure the performance and achievements of each of these individuals you need to employ some of these metrics, one metric that you should analyze is monthly recurring revenue usually abbreviated as MRR.

Monthly Recurring Revenue (MRR) refers to income that a business can count on receiving every single month normally referred to as predictable revenue or a service that is billed on a monthly basis. Alternatively, monthly recurring revenue is a measure of a business’s predictable revenue that it expects to earn each month.

Monthly Recurring Revenue is critical for companies that offer various pricing plans for their products or services. It is the most important metric for any subscription business. It can be acquired when there is a new customer and this gives you assurance of the monthly income.

A breakdown of the uses of Monthly recurring revenue;

  • Measures the company’s monthly revenue, basically.
  • Helps to know how much is generated each month
  • Measures Revenue trends over time
  • Can also compare MRR to the monthly sign up rate for your product or service
  • Measures Monthly account growth rate
  • Helps to know Customer retention
  • Its analysis helps to know if your revenue is shrinking or growing over time
  • Informs sales leaders so they can make educated business decisions

Related: What is a sales-matrix?

Who uses monthly recurring revenue?

Monthly recurring revenue is usually used by Software-as-a-Service companies that generate revenues using a subscription business-based model.

When do companies use MRR?

  • Companies use MRR when measuring financial forecasting. Because it is an expected monthly financial flow, companies use it to forecast their future finances.
  • MRR is used to evaluate a company’s growth trends. It gives a smooth and clear view of the revenues hence a company can tell consistent and comparable growth trends.

How do companies calculate Monthly recurring revenue?

There are two methods companies employ when calculating MRR;

The first method is;

Revenue Per Customer

This is the easiest method of calculating monthly recurring revenue by determining the monthly revenue each customer gives to the company. Simply calculate revenue from each customer and then find the sum of all revenues obtained from all customers.

Taking into consideration that MonkeyPesa has 50 customers who subscribed to a monthly payment for its digital marketing services and an assumption that each customer pays one million Ugandan shillings per month. Expressing it mathematically; 1 customer = 1 x 1, 000,000

50 customers=50 x 1,000,000

MonkeyPesa’s Monthly Recurring Revenue =50,000,000

The second method of calculating MRR is;

Using Average Revenue per User (ARPU)

The first step in this method is the calculation of the monthly Average Revenue per User. Calculating Average Revenue per User can be done using the formula below:

Average revenue per user =         Total Revenue/Average No. Users (monthly)

Assuming that MonkeyPesa‘s total revenue is 10,000,000 Ugandan shillings and the average number of users is 5, ARPU= 10,000,000/5=2,000,000

Average revenue per user is determined on a monthly basis, when you get a company’s average revenue per user, monthly recurring revenue is calculated as;

Monthly Recurring Revenue= ARPU x Total Number of Customers, given that you already have your ARPU as 2,000,000 and 5 as the number of customers.

MRR =2000000 x 5 =10,000,000 Ug.shs

Monthly Recurring Revenue is of different types, these include;

  • New Monthly Recurring Revenue; this is the additional MRR that’s earned from brand new customers. 
  • Expansion Monthly Recurring Revenue; This refers to additional MRR from your existing or current customers. It is also known as an upgrade and can also result from an upsell or cross-sell
  • Churned Monthly Recurring Revenue; This is the revenue that is lost or has been lost due to customers’ canceling of subscriptions or downgrading
  • Net New Monthly Recurring Revenue; To calculate MRR you use both; New MRR, Expansion MRR, and Churn MRR. Calculating Net New MRR helps to indicate whether there has been an increase or decrease in the revenues in the previous period.

Net New MRR = New MRR + Expansion MRR – Churned MRR

If the sum of new MRR and expansion MRR is less than churned MRR, then you lost money. But if they are greater than churn MRR, you have gained money.

Read: Developing A sales-formula

Learn how you can grow your MRR.

1.Charge more and highly

Most companies charge less for their products hoping to attract more customers and this undermines the growth of their MRR. If your business is solving real and tangible problems for your customers then don’t fear to charge them double prices as long as what you are doing is worth it.

2. Use upsells

As a business manager, it’s easy to trust the previous customers as compared to new ones, it is cheaper to grow revenue from previous customers than new ones. If your previous and current customers are benefiting from your business then you don’t have to worry about matching your price with the value they get, at least the value they get from your business should match your price and therefore you are set an upgrade.

3. Do away with free trials

Giving free trials to your customers is one of the ways in which your business can easily lose out, in making free trials as software business you spend on many things like Data yet you are not gaining in return. Additionally, when customers get used to free goods once they are asked to pay for the service, many of them tend to leave or quit,  this doesn’t make it a good exercise because some of the customers tend to undermine the value of the product as long as it is for free. Offering a free service to the customer as means of trying software is bad in a way that the customer takes it that your product is of very little value and you also can’t even do that much for them.

4. Don’t stick your products to a maximum price.

Some companies irrespective of the services they provide, they set their price high and this tends to scare away new customers. A good businessman with an appropriate business mind charges his or her clients depending on the value of the services they provide and how much a customer uses those specific services. A customer will pay depending on how much they are benefiting from your support not simply because of the price you set. To keep customers coming in simply charge them according to the services they need and what you can offer in return.

Importance of MRR

1.Tracking and measuring Performance

You calculate the performance of your companies, divisions, teams, down to the individual performer based on Monthly Recurring Revenue attainment. MRR is important to individual sales reps as it is for management. It allows salespeople to see the size of the accounts they manage and how much they would earn at the end of the month. If you earn a commission based on the MRR you close, your take-home pay could be impacted depending on the proportion of high and low MRR customers you have sold too, this positively affects your performance and earnings.

2.Forecasting sales

Depending on the monthly recurring revenue attained, the company and the sales team can estimate their future sales forecasts following estimations based on their individual and team performance. Considering the total MRR, they can make more accurate sales forecasts, strategies and projections thus helping the business team to plan accordingly in respect to achieving their set short and long term goals.

3.Budgeting

Monthly recurring revenue is a key measure of your business’ success, business planning, and decision making and budgeting as well. Monthly Recurring Revenue tells business leaders how much money is coming in each month that can be reinvested. Monthly recurring revenue helps you to make financial informed decisions about what you should do in regards to budgeting. It also indicates whether their steady income to run a successful business.

Final thoughts and words

Monthly Recurring revenue is one of the things that software and digital marketing companies rely on to grow and expand more and more thus they should attach great value to it as they provide services to their esteemed customers.

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