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How to Calculate Net MRR
This post is part of our Most Valuable Metrics series, helping your company understand how to develop a holistic framework for tracking your performance and telling your story to everyone who matters to your business. You can find previous posts in the series here:
Like every SaaS business, consistent subscription revenue is vital to your success. That’s why knowing your Monthly Recurring Revenue, or MRR, is so important. MRR is a measurement of the total predictable revenue you expect to make on a monthly basis.
Here’s a very simple example of MRR. You have three customers with the following subscription rates.
- Customer X pays $75/month
- Customer Y pays $50/month
- Customer Z pays $25/month
Your total MRR is $75 + $50 + $25 = $150.
Net MMR gives your company a holistic overview of revenue gained from new subscriptions and upsells/upgrades and revenue lost from downgrades and cancellations.
MRR might not be part of GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) but because of its importance in raising capital and gauging your sales and marketing success, it is crucial to understand and calculate correctly. Unintentionally misrepresenting your business to potential investors or developing your business plan on faulty data could spell disaster for your company.
To start, when calculating your MRR, do not include the following.
Full value of multi-month contracts: If you have quarterly, semi-annual, or annual contracts, normalize them to a monthly rate. Take the full subscription amount paid and divide it by the number of months in the contract. For example, your customer pays you $1,200 for an annual subscription. Dividing that by 12 gives you a monthly rate of $100 which you should use in your MMR calculation instead of $1,200.
One-time payments: One-time payments are not recurring, so you shouldn’t include them in your MMR calculation. One-time payments are not the same as multi-month payments. Even though a customer is paying a lump sum payment for those months, you expect the customer to make another lump sum payment at the end of the subscription period. With one-time payments, you don’t expect the customer to make another subscription payment.
Trialers: Until trial customers convert to being regular customers, don’t include their expected subscription values in your MMR calculation.
Now that you know how to determine your MRR and understand what should be excluded, you can calculate your net MRR. Net MRR includes the following:
New MRR: MRR from new customers
Expansion MRR: MRR from gained from existing customers when they upgrade their subscriptions
Churned MRR: MRR lost from existing customers when they downgrade or cancel their subscriptions
So, the formula for calculating Net MRR is:
Knowing the three elements of Net MRR is critical to understanding how your business is growing. Ideally your Expansion MRR should be greater than your Churned MRR each month. If it is, then you’re doing something right with your existing customers!
Want to read more on Monthly Recurring Revenue and how it impacts your business as your grow?
- SaaS Metrics 2.0 – Detailed Definitions from Matrix Partners’ David Skok
- Why most SaaS startups should aim for negative MRR churn by Christoph Janz of Point Nine Capital
- SaaS Metrics for Fundraising from Intercom’s Bobby Pinero
- Diligence at Social + Capital: Accounting for Revenue Growth from Jonathan Hsu
