Monthly Recurring Revenue: What is it?
MRR, or Monthly Recurring Revenue, is the core of a SaaS company’s business model. To learn more about the meaning of MRR, how to calculate MRR, and minimize MRR churn, read more below.
MRR: What is it?
What is MRR? Monthly Recurring Revenue is how much money your company can be expected to bring in every month. Generally, this has to do with subscription costs, retainers, and other predictable purchasing habits. The rationale behind MRR is simple: you need to be able to project out your company’s future revenue. The calculations behind it can be more complex.
Going beyond the simple MRR meaning, MRR is a functional metric through which you can gauge your company’s income and success. If your MRR is growing over time, your business is growing; if your MRR is shrinking, then your company may experience lean times in the future. MRR trends are incredibly important to subscription-based businesses, because they compound over time. Once MRR begins shrinking, it can be difficult to control.
A company must calculate its MRR not only based on its active subscriptions, but also whether these active subscriptions are trending upwards or downwards. In the case of subscriptions or contracts that are ending, the company must also track which customers are ending their subscriptions, and which new subscriptions are coming on board.
Every recurring revenue-based business needs to have an MRR calculator that can project out the future performance of the business, based on the active contracts it will have in the following months. Ideally, a business will be able to use its MRR calculations to project out a year at a time, so the company can review and analyze its future finances.
An MRR calculator will be unique to a business. Some businesses have predictable recurring revenue: they have year long contracts with customers. Other companies have less predictable recurring revenue: their customers can sign up and cancel at any time, so they need to pay more attention to general trends. Over time, a company will develop a firmer understanding of its MRR.
Most advanced accounting and customer relationship management suites can be used to produce reports related to MRR. This is especially true for accounting solutions and point-of-sale systems which are specifically designed for handling subscription fees.
In addition to MRR itself, a company needs to pay attention to its churn: the amount of customers coming and going. All these stats, together, are going to form the basis of the company’s strategies, informing the company on how the business is doing, how customers are responding to it, and whether the company is currently growing or shrinking.
MRR Churn Rate
Most companies spend a great deal of time and financial resources on customer acquisition. This is particularly true in those early months and years of a startup. Acquiring new customers never gets old and watching your sales grow is a good indicator that you have a product that sells. But having a product or service that sells is not the only metric in determining the success of your company. Customer churn is another key metric to be concerned about.
How to Calculate Churn Rate for Your SaaS Startup
While determining an accurate churn rate for some products and services can be challenging, calculating the churn rate for a SaaS is relatively easy. Simply take the number of customers lost through non-renewal or cancellation and divide that number by the number of total customers you had at the beginning of the given period. If, for example, you started the quarter with 10,000 customers, but lost 480 of them through that quarter, your churn rate is 4.8% quarterly.
The Impact of Churn on Your Bottom Line
Most start-ups don’t pay a lot of attention to churn, especially early on. As we said, during this period it is all about the sales. But if you will be looking for investors, you can be sure they will be looking at churn. Churn rate is a huge indicator of customer satisfaction and can foretell the future of your company.
If you have a churn rate of 4% a month, that may make you feel pretty good. You could view that as a 96% retention rate. But if you are churning 4% of your customers each month, you are turning over almost half of your customers each year. As your business grows, the number of customers lost will increase, placing even more pressure on creating new sales.
Monthly SaaS Churn Rate
If you are doing it right, your customer churn rate should trend like this over time…one of the few times that “up and to the right” is the opposite of what you want.
You can determine the actual cost in dollars of churn by multiplying the number of customers lost by your average customer worth. It can really get your attention when expressed in actual dollars.
Minimizing Your Churn Rate
If you are uncomfortable with your churn rate, it is time to start talking to your customers and your recently lost customers. Determine what you are doing right, and the reasons churn is happening at the rate it is. It could be something easily fixed like better communication or small product improvements. But you can’t address it if you don’t have a churn rate to track. It is especially critical for new and growing companies.
MRR churn is the percentage of revenue lost every month due to cancellations. Naturally, every business wants to reduce this churn. Tracking this churn is especially important for marketing strategies: if churn percentage is rising, that means that more customers are unsatisfied, even if MRR and subscriptions may be going up. The company may need to improve upon its customer retention strategies.
A large percentage of churn is never good: it costs more to acquire a new customer than it does to retain an old one. Because of this, companies that want to reduce their overhead and scale upwards need to concentrate on keeping the customers they have. If MRR churn is consistently increasing, then the company may risk a revenue drought.
Churn is fundamental to an SaaS company’s growth, and luckily the churn calculation is fairly simple: a company need only find the percentage of revenue lost via cancellations. As long as the company knows its current MRR and its churn percentage, it can also project out how much revenue it will lose to churn every month.
MRR and MRR churn for a company may look like this:
- The company currently has $50,000 in recurring subscription fees.
- In the prior month, the company lost $5,000 in cancellations, but gained $10,000 in new accounts.
- In the next month, it can be anticipated the company will lose $5,000 but gain $10,000.
- The company’s projected recurring subscription fees for the next month will be $55,000.
- The company’s current MRR churn rate is 10%.
Apart from this, the company’s growth is at around 10%, and trends over time will tell the company whether its MRR churn rate and its new account subscription rate are going up or down.
As with MRR, a company can use a spreadsheet or another calculator system to determine its churn metrics. MRR and churn should be a part of the company’s financial statements, and should be regularly reviewed for core insights into how the company is doing and whether any changes need to be made in its retention policies.
Churn rate vs. retention rate: churn rate differs slightly because it is the rate of revenue that is being churned away from the company, rather than the amount of customers retained. A company could have a high churn rate alongside a high retention rate if they are frequently losing high value customers but retaining large volumes of low value customers.
In general, companies are able to reduce their churn rates by improving upon customer satisfaction. Regular surveys regarding customer satisfaction and improved customer service are usually key to reducing churn rates and improving overall customer retention. Companies may also need to identify any gaps in their current product and service offerings if they find that customers are frequently leaving, or are leaving to competing companies.
Other SaaS Metrics
MRR and churn rate are only two of the SaaS metrics that your company should be tracking. As an SaaS company, your metrics are going to be of exceeding importance. Most SaaS companies need to scale fairly aggressively, and must constantly be moving. Sales and sticky revenue are more important for SaaS companies than others, as widespread adoption is a key to success.
Here are a few of the most important SaaS metrics, in addition to SaaS churn and MMR:
- Customer lifetime value. This is the total amount that a customer is expected to spend on the platform throughout their entire relationship with it. For SaaS startups, it may be difficult to gauge customer lifetime value, but it’s important when determining how much to spend to acquire and retain customers.
- Customer acquisition cost. This is the total amount it costs to acquire a customer, which will often be compared to the customer lifetime value. Ideally, a company should be able to reduce customer acquisition cost to at least a third of the customer’s value.
- Customer retention rates. Poor customer retention isn’t just bad for finances; it’s an indicator that there could be a core issue with the solution itself. Customer retention rates are always a major feature of revenue development.
- Customer acquisition rates. Customer acquisition relates directly to how fast your company is growing. Your customer acquisition needs to be continuously outpacing your customer churn; otherwise your platform is going to experience shrinkage. Over time, customer churn tends to grow. Customer acquisition must grow as well.
- Number of active users. Your number of active users is one of the most direct metrics that you can use to determine your success. Your revenue may be shrinking, but your active users are growing: that means that you have a product that can be monetized, you just need to work on your monetization and your commitment strategies.
A SaaS metrics spreadsheet can make it easier for you to track all the important metrics for your financial statements. Likewise, there are a number of software platforms that are designed to keep track of your financials for you. These products can be used to produce reports for your financial meetings, and to give you a better handle on how your company is growing and developing within the SaaS space.
Changes within the SaaS market can happen quickly. Your growth trends are going to mean everything in terms of your company’s performance, especially within highly competitive spaces. Being able to accurately predict your growth into the future comes from a thorough understanding of your numbers right now.