Understanding MRR In SaaS: Calculation And Importance

Arnob Mukherjee -

Running a SaaS business is no easy feat. You're constantly juggling customer demands, product development, and the ever-present threat of churn. It can be overwhelming.

But not clearly understanding your business's financial health is even worse than dealing with these challenges.

That's where Monthly Recurring Revenue (MRR) comes in.

It's a critical metric for any SaaS business looking to monitor its growth and financial performance. But what exactly is MRR, and why is it so important?

In this blog, we'll learn what Monthly Recurring Revenue (MRR) is, why it's essential for SaaS, and how to use it to make smarter decisions.

Let’s get started!

What Is MRR?

MMR stands for Monthly Recurring Revenue and is a measure of recurring revenue from your customers every month.

Knowing your MRR is crucial for SaaS businesses because it provides a clear and predictable indication of your company's financial health. It lets you forecast your revenue better, understand your customer's buying behavior, and make informed decisions about your product roadmap.

When you have a great product coupled with a solid marketing strategy, your MRR will be significant monthly.

Why Is MRR Important For SaaS?

When you have the overview of your MRR, you can make informed decisions about your product roadmap, sales, and marketing efforts. You can also forecast your revenue better, understand your customer’s buying behavior, and build a solid foundation for growth strategies.

Still, there are multiple reasons why you should consider MRR as a metric, but here are the most important ones:

1. Shows Customer Satisfaction

According to the study “Effect of Customer Satisfaction on Company Performance,” customer satisfaction can directly affect sales. So when your customers are satisfied with the product's value and service, they are more likely to renew their subscription every month.

You can track this with the help of your MRR value.

Constant or increasing MRR shows you retain customers and possibly upsell additional services. However, if MRR decreases, it may signal that you are experiencing customer churn, prompting us to investigate the causes and take corrective actions.

But remember, it can be anything from customer service to product usability. The best way to locate and eliminate these issues is to ask your customers directly.

You can do this by sending out a survey or running focus groups with them. The feedback will help you better understand their needs and how they perceive your product.

2. Helps Make Better Decisions

Knowing how much revenue your business generates each month allows you to make better decisions about future products, marketing campaigns, and other aspects of the company.

For example, if your product has a high MRR, you can analyze your customer needs and bring new features to market to help you retain and increase this revenue. If your MRR is low, it may be time to re-evaluate your product or consider a new marketing strategy.

3. Helps Gauge Business Stability

MRR is an excellent way to gauge your business’s stability and predict its future. If you have a high MRR, you will likely be stable for at least the next few months. A predictable income gives you the freedom to build ambitious plans and increases your chances of making those plans real.

Forecasting future earnings, planning expenses, and creating a company's "safety bag" becomes more manageable—a list of things needed for immediate purchase should an unexpected financial crisis arise.

In addition, if you consistently grow your MRR each month, your business is trending upward and may be ready for expansion or additional investment.

4. Gives Clear Picture Of Expansion And Investment

You can even segment MRR data to show expansion and investment clearly.

By segmenting MRR data based on factors like customer type or geographic region, we can identify areas with high growth potential. This information allows us to make informed decisions about where to allocate resources, such as marketing, sales, and customer support, to capitalize on opportunities and drive our company's success

- Founder & CEO of Folderly.

If one of your MRR segments is growing faster than others, it might be time to explore new markets or add more features to your product. You can also see whether or not the rate of growth has slowed down, indicating that it may be time to reevaluate pricing or marketing strategies.

How To Calculate MRR?

Calculating a SaaS business's MRR (Monthly Recurring Revenue) is relatively simple. Here's a simple formula to do it,

MRR = Number of subscribers under a monthly plan * ARPU

ARPU stands for Average Revenue Per User – the average monthly revenue each customer generates. For example, if you have 30 customers on a monthly plan and they each pay $500/month, then your MRR would be $15,000.

To accurately calculate your Monthly Recurring Revenue (MRR) for your SaaS business, you should include the following items:

  1. Recurring subscription fees: This is the monthly fee each customer pays for their subscription to your SaaS product. Ensure to include all recurring subscription fees, even if they vary based on different pricing tiers or plans.
  2. Add-ons or upgrades: If you offer additional features or services that customers can purchase on top of their subscription, include the recurring fees for these add-ons or upgrades.
  3. Discounts or promotions: If you offer discounts or promotional pricing to specific customers or during certain periods, adjust the subscription fees accordingly to calculate your MRR accurately.
  4. Churn or cancellations: If customers cancel their subscriptions or churn, subtract their recurring fees from your MRR calculation.
  5. Free trials: If you offer free trials of your product, ensure not to include these users in your MRR calculation until they convert to paying customers.

Including all these items in your MRR calculation can give you an accurate picture of the monthly recurring revenue generated by your SaaS business, which can help inform decisions about growth strategy and financial planning.

Wrapping Up

To sum up, recurring revenue is a critical metric for SaaS companies as it gives you an idea of how profitable your business is on an ongoing basis. It also helps you understand your customer base's health and improve your growth strategy and financial planning decisions.

It is essential to evaluate your MRR and take the necessary steps to fix any issues that may be holding your recurring revenue back from reaching its full potential.

The best way to evaluate and eliminate the obstacles is to ask your customers. However, collecting feedback from multiple sources and organizing them together is a nightmare without a proper tool.

That's where Olvy comes in. Olvy helps you collect customer feedback from multiple sources and organize it together in one place.

You can use Olvy to collect feedback from your website, email, live chat, and even social media accounts. It also allows you to create tasks and roll out the features or improvements based on your collected feedback.

So, if you haven't already, start tracking your MRR today and leverage the insights it provides to take your business to the next level.