Understanding MRR (Monthly Recurring Revenue)
Learn what MRR is, how to calculate it, and why it's the most important SaaS metric for tracking and growing your business.
What is MRR?
MRR (Monthly Recurring Revenue) is the total predictable revenue a SaaS business expects to receive every month from all active subscriptions. It's the foundation metric for SaaS businesses because it represents the predictable, recurring revenue stream that makes the SaaS model so valuable.
MRR is normalized to a monthly amount regardless of billing frequency. This means whether a customer pays monthly, quarterly, or annually, their contribution to MRR is always expressed as a monthly value.
Why MRR is the Most Important SaaS Metric
MRR is considered the most important SaaS metric for several reasons:
- Predictable revenue: MRR shows how much revenue you can reliably expect each month
- Growth tracking: It's the primary metric for measuring business growth over time
- Forecasting: MRR enables accurate revenue forecasting and planning
- Investor reporting: Investors and stakeholders use MRR to evaluate business health and growth potential
- Foundation for other metrics: MRR is used to calculate churn rate, customer lifetime value, and growth rate
- Valuation: SaaS companies are often valued as a multiple of MRR or ARR
How to Calculate MRR
To calculate MRR, sum the monthly subscription value of all active customers:
MRR Formula:
MRR = Sum of all monthly subscription values
Normalizing Different Billing Frequencies
Since MRR must be normalized to monthly amounts:
- Monthly subscriptions: Use the monthly price directly
- Annual subscriptions: Divide the annual amount by 12
- Quarterly subscriptions: Divide the quarterly amount by 3
- Weekly subscriptions: Multiply the weekly amount by 4.33 (average weeks per month)
Example Calculation
Let's say you have:
- 10 customers paying $50/month = $500
- 5 customers paying $100/month = $500
- 2 customers paying $1,200/year = $200/month ($1,200 ÷ 12)
- 1 customer paying $300/quarter = $100/month ($300 ÷ 3)
Your total MRR = $500 + $500 + $200 + $100 = $1,300
Types of MRR
To get a complete picture of your revenue, track these different types of MRR:
- New MRR: Revenue from new customers acquired in the period
- Expansion MRR: Revenue increases from existing customers (upgrades, add-ons)
- Contraction MRR: Revenue decreases from existing customers (downgrades)
- Churned MRR: Revenue lost from cancellations
- Reactivation MRR: Revenue from customers who returned after canceling
Net New MRR
Net New MRR shows the net change in MRR after accounting for all movements:
Net New MRR Formula:
Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churned MRR
MRR vs ARR
MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) are related but serve different purposes:
- MRR: Monthly recurring revenue - better for month-to-month tracking and operational decisions
- ARR: Annual recurring revenue - calculated as MRR × 12, commonly used for annual planning and investor reporting
Both metrics are important, but MRR provides more granular insights for day-to-day business management.
Best Practices for Tracking MRR
- Track MRR daily: Update MRR calculations daily to catch changes immediately
- Segment by plan: Track MRR by pricing tier to understand which plans drive revenue
- Monitor MRR movements: Track new, expansion, contraction, and churned MRR separately
- Calculate MRR growth rate: Track month-over-month and year-over-year growth
- Use MRR for forecasting: Use historical MRR trends to forecast future revenue
- Report consistently: Use the same calculation method and time period for all MRR reporting
Common MRR Calculation Mistakes
Avoid these common mistakes when calculating MRR:
- Including one-time revenue: MRR should only include recurring subscription revenue, not one-time payments
- Not normalizing billing periods: Always convert annual/quarterly subscriptions to monthly amounts
- Including trial customers: Only count paying customers, not free trials
- Double-counting: Don't count the same customer multiple times if they have multiple subscriptions
- Including setup fees: One-time setup fees should not be included in MRR
Using MRR to Drive Growth
Once you're tracking MRR accurately, use it to:
- Set growth targets: Set specific MRR growth goals (e.g., 10% month-over-month)
- Identify growth drivers: Analyze which customer segments or plans contribute most to MRR growth
- Optimize pricing: Test pricing changes and measure their impact on MRR
- Forecast revenue: Use MRR trends to predict future revenue and plan accordingly
- Measure sales performance: Track how new MRR acquisition compares to targets
Frequently Asked Questions
What is MRR (Monthly Recurring Revenue)?
MRR (Monthly Recurring Revenue) is the total predictable revenue a SaaS business expects to receive every month from all active subscriptions. It's calculated by summing up the monthly subscription value of all active customers, normalized to a monthly amount regardless of billing frequency.
How do you calculate MRR?
To calculate MRR, sum the monthly subscription value of all active customers. For annual subscriptions, divide the annual amount by 12. For example: If you have 10 customers paying $50/month, 5 customers paying $100/month, and 2 customers paying $1,200/year (which is $100/month), your MRR = (10 × $50) + (5 × $100) + (2 × $100) = $1,200.
Why is MRR important for SaaS businesses?
MRR is the most important SaaS metric because it provides a clear picture of predictable revenue, enables accurate growth forecasting, helps track business health, and is essential for investor reporting and valuation. It's the foundation for calculating other key metrics like churn rate, customer lifetime value, and growth rate.
What's the difference between MRR and ARR?
MRR (Monthly Recurring Revenue) is the monthly recurring revenue, while ARR (Annual Recurring Revenue) is the yearly equivalent. ARR = MRR × 12. ARR is commonly used for annual planning and investor reporting, while MRR is better for month-to-month tracking and operational decisions.
What are the different types of MRR?
Common MRR types include: New MRR (from new customers), Expansion MRR (from upgrades and add-ons), Contraction MRR (from downgrades), Churned MRR (from cancellations), and Reactivation MRR (from returning customers). Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churned MRR.