Financial stability and predictable growth are critical for any company—especially for early-stage startups. In fact, according to a CB Insights study, one of the top reasons startups fail is due to poor financial planning, which often results in cash flow problems. To avoid this, early-stage startups must focus on key financial metrics that offer insight into the company’s financial health. One of the most important metrics in this regard is Monthly Recurring Revenue (MRR).
Consider this: companies with a recurring revenue model grow their revenue 5 times faster than those relying on one-time sales, according to Zuora’s Subscription Economy Index. Moreover, 90% of SaaS startups cite recurring revenue as the primary source of income. As a founder, understanding and optimizing MRR is not just a smart choice—it’s critical for survival in an ever-evolving market.
However, calculating and interpreting MRR can be tricky, especially in the early stages where your startup is still defining its growth path. Missteps in tracking MRR can skew financial forecasting, lead to cash flow problems, and confuse investors.
This guide is designed to help early-stage founders and startups grasp the concept of MRR, understand how to calculate it accurately, avoid common mistakes, and use it to drive growth.
By the end of this guide, you will:
- Understand the different types of MRR and how they influence your startup’s financial health.
- Learn how to calculate MRR correctly.
- Discover key MRR-related metrics that will help you gain deeper insights into your business.
- Explore actionable strategies to increase your MRR and grow your startup sustainably.
Whether you’re trying to raise funds, reduce churn, or forecast future growth, mastering MRR is the key to understanding your startup’s financial engine. Let’s dive in!
What is MRR?
MRR, or Monthly Recurring Revenue, is the predictable revenue a business expects to earn each month from its active customers. Unlike one-time payments or irregular sales, MRR offers a steady and reliable income stream, making it particularly valuable for SaaS and subscription-based startups.
MRR serves as a normalization metric, enabling businesses to report performance across different subscription terms and pricing models. For example, whether customers sign up for monthly, quarterly, or annual subscriptions, MRR allows you to aggregate all revenue into a standardized monthly figure. This helps early-stage startups track performance, measure growth, and forecast future revenue more accurately.
The MRR Reporting Challenge
To highlight why MRR is so critical, consider the following real-world scenarios:
- Customer A subscribes to a one-year term with a $1,200 total contract value.
- Customer B subscribes to a two-year term with a $2,400 total contract value.
- Customer C upgrades mid-term, adding $845 in contract value to what was previously a $1,200 contract, now totaling $2,045.
- Customer D downgrades mid-term, reducing $562 from what was previously a $1,200 contract, leaving a contract value of $638.
- Customer E has a $1,200 annual contract, but updates and extends the contract mid-term, establishing a new end date.
- Customer F fails to renew a three-year contract with a total contract value of $3,600.
Without MRR, using traditional revenue tracking methods, these varied subscription terms and adjustments (upgrades, downgrades, and cancellations) would make it difficult to get a clear picture of your startup’s financial health. MRR simplifies this process by providing a normalized, consistent measure of recurring revenue.
For early-stage startups, accurately tracking MRR is essential for reporting performance, making financial forecasts, and attracting investors.
Why Tracking MRR is Important for Early-Stage Startups
As a startup founder, your primary focus is likely on growth—acquiring customers, scaling operations, and refining your product. However, if you fail to track key financial metrics like MRR, you could be growing in the wrong direction or bleeding revenue without realizing it. Here are a few critical reasons why tracking MRR is vital for your early-stage startup:
1. Financial Predictability
MRR offers your startup a clear view of predictable revenue streams, allowing you to better allocate resources, hire staff, and invest in product development. Financial stability is critical for early-stage companies that may face fluctuating sales cycles and unpredictable customer behavior. With a stable MRR, you can better manage cash flow and avoid financial surprises.
2. Growth Forecasting
MRR serves as an excellent tool for tracking growth over time. By monitoring your MRR month-over-month, you can identify trends, spot areas of concern (such as high churn), and determine whether your startup is moving in the right direction. In essence, MRR helps you understand if your business is scaling or stagnating.
3. Investor Confidence
Investors love MRR because it demonstrates financial stability and predictability, which is crucial for assessing the sustainability of a business. A high, steadily growing MRR signals that your startup has a viable subscription model that attracts and retains customers. This makes your company a more attractive prospect for investment.
4. Decision-Making
MRR data helps you make data-driven decisions about where to invest time and resources. For example, if you notice a sharp decline in MRR, it might indicate customer dissatisfaction, prompting you to investigate product quality or customer support. Conversely, steady MRR growth might suggest that it’s time to scale by investing in marketing or expanding your product offerings.
How to Calculate MRR
Calculating MRR is relatively straightforward, but accuracy is key, especially for early-stage startups where even small errors can lead to incorrect conclusions about growth.
Here’s the basic formula for calculating MRR:
MRR = Total Number of Customers × Average Revenue Per User (ARPU)
Steps to Calculate MRR:
- Determine the Number of Active Subscribers: Count the total number of paying customers in a given month.
- Calculate ARPU: Find the average revenue per user. If customers are paying different prices for various subscription plans, take the average.
- Multiply Total Customers by ARPU: This gives you the total MRR for the month.
Example:
Let’s assume your startup has 100 customers. Of these:
- 50 customers are paying $50/month.
- 30 customers are paying $100/month.
- 20 customers are paying $150/month.
Your MRR calculation would be: (50 × $50) + (30 × $100) + (20 × $150) = $2,500 + $3,000 + $3,000 = $8,500 MRR
If you have annual subscribers, simply divide the annual contract value by 12 to normalize their revenue into a monthly figure.
Example for Annual Plan:
If a customer pays $1,200 for an annual subscription, divide $1,200 by 12 to get $100 MRR for that customer.
Common Mistakes When Calculating MRR
For early-stage startups, calculating MRR accurately is crucial because even small miscalculations can lead to flawed growth strategies and misleading forecasts. Below are some common mistakes startups make when calculating MRR:
1. Including One-Time Payments
MRR should only include recurring subscription revenue. Exclude any one-time fees such as onboarding costs, setup charges, or consulting services. Including these in your MRR calculations will give a misleading picture of your recurring revenue.
2. Failing to Update for Churn
If a customer cancels or downgrades their subscription, your MRR should immediately reflect this change. Failing to update MRR for churn can make your revenue appear more stable than it is, leading to poor financial planning.
3. Not Accounting for Discounts
When calculating MRR, it’s essential to reflect any discounts or promotional pricing your customers are using. If a customer is paying a discounted rate of $75 on a $100/month plan, your MRR calculation should reflect the discounted price.
4. Ignoring Upgrades and Downgrades
Your MRR should be updated whenever customers change their subscription plans. Whether they’re upgrading to a premium plan or downgrading to a more basic offering, the change must be reflected in your MRR.
Example:
If a customer upgrades from a $50/month plan to a $100/month plan, your MRR should increase by $50. If another customer downgrades from $100/month to $50/month, your MRR should decrease by $50.
The 8 Types of MRR
Understanding the different types of MRR gives you deeper insights into the specific factors driving your startup’s revenue. As an early-stage startup, you need to break down MRR into these categories to identify growth opportunities and potential risks.
Here are the 8 types of MRR that every early-stage startup should track:
1. New MRR
Definition: Revenue generated from new customers during a given month.
Example: If you gain 10 new customers, each subscribing to a $100/month plan, your New MRR would be: New MRR = 10 customers × $100 = $1,000
Importance for Startups: New MRR shows how effective your acquisition strategies are in attracting new customers. For an early-stage startup, consistent growth in New MRR is critical for scaling.
2. Expansion MRR
Definition: Additional revenue generated from existing customers who upgrade their plans or purchase add-ons.
Example: If five customers upgrade from $50/month plans to $100/month plans, your Expansion MRR would be: Expansion MRR = (5 customers × $50 additional revenue) = $250
Importance for Startups: Expansion MRR is crucial because it shows how well you are monetizing your existing customers. For early-stage startups, increasing revenue from current customers through upselling and cross-selling is more cost-effective than acquiring new customers.
3. Churned MRR
Definition: Revenue lost due to customer cancellations.
Example: If two customers paying $200/month cancel their subscriptions, your Churned MRR would be: Churned MRR = (2 customers × $200) = $400
Importance for Startups: Churned MRR is a direct reflection of customer dissatisfaction. High churn can be detrimental to your startup’s growth, making it essential to monitor and reduce churned MRR.
4. Contraction MRR
Definition: Revenue lost from customers downgrading their subscriptions or receiving discounts.
Example: If a customer downgrades from a $100/month plan to a $50/month plan, the Contraction MRR would be: Contraction MRR = $100 – $50 = $50
Importance for Startups: Contraction MRR highlights customer dissatisfaction with premium offerings. If this number is high, it may indicate that your higher-tier plans are not providing enough value.
5. Downgrade MRR
Definition: The specific revenue lost when customers downgrade to a lower-tier plan, excluding other factors like discounts.
Example: If three customers downgrade from $200/month plans to $100/month plans, your Downgrade MRR would be: Downgrade MRR = (3 customers × $100 decrease) = $300
Importance for Startups: Downgrade MRR is a key indicator that some customers may not see value in your higher-tier offerings, prompting you to revisit your pricing or feature set.
6. Reactivation MRR
Definition: Revenue gained from previously churned customers who re-subscribe to your service.
Example: If two customers who previously churned return and subscribe to a $150/month plan, your Reactivation MRR would be: Reactivation MRR = (2 customers × $150) = $300
Importance for Startups: Winning back churned customers is often more cost-effective than acquiring new ones, making Reactivation MRR a valuable metric for long-term growth.
7. Net New MRR
Definition: The net change in MRR for a given month, factoring in New MRR, Expansion MRR, Churned MRR, and Contraction MRR.
Formula: Net New MRR = New MRR + Expansion MRR – Churned MRR – Contraction MRR
Example: If your New MRR is $1,500, Expansion MRR is $500, Churned MRR is $300, and Contraction MRR is $200, your Net New MRR would be: Net New MRR = $1,500 + $500 – $300 – $200 = $1,500
Importance for Startups: Net New MRR is the ultimate measure of whether your startup is experiencing real growth. Positive Net New MRR indicates that you’re gaining more revenue than you’re losing, while negative Net New MRR shows that churn and downgrades are outpacing growth.
8. Reactivation MRR
Definition: The monthly recurring revenue generated by previously churned customers returning to a paid plan.
Example: If 5 previously churned customers resubscribe to your product at $100/month, the Reactivation MRR would be: Reactivation MRR = 5 customers × $100 = $500
Importance for Startups: Reactivating churned customers can boost revenue without incurring Customer Acquisition Costs (CAC). Tracking Reactivation MRR helps measure the success of your win-back strategies.
How to Use MRR Calculations to Benefit Your Startup
Now that we’ve covered the different types of MRR, let’s explore how you can use these calculations to guide decision-making in your early-stage startup.
1. Track Growth Trends
By monitoring your Net New MRR month-over-month, you can track whether your business is growing, stagnating, or shrinking. A consistent increase in Net New MRR indicates healthy growth, while a decline should prompt you to investigate potential causes, such as high churn or product dissatisfaction.
2. Customer Retention Strategies
MRR breakdowns help you identify specific issues with customer retention. For example, high Contraction MRR may indicate that customers aren’t seeing enough value in premium offerings, while high Churned MRR signals a more serious issue with customer satisfaction. These insights can inform customer retention strategies, such as improving customer support, optimizing your product’s value proposition, or offering incentives to reduce churn.
3. Sales and Marketing Optimization
MRR metrics can also guide your sales and marketing strategies. If New MRR is high but your overall MRR is stagnant, this could indicate a churn issue, suggesting a need to refine customer retention efforts. Conversely, if Expansion MRR is low, it might be time to focus more on upselling and cross-selling to your existing customer base.
4. Budgeting and Resource Allocation
MRR helps you forecast future revenue, which is essential for effective budgeting and resource allocation. Knowing your MRR allows you to plan for expenses like hiring, product development, and marketing with confidence that you’ll have the revenue to support these investments.
5. Attracting Investors
For early-stage startups seeking investment, a steady or growing MRR is an attractive metric for potential investors. MRR demonstrates that your business model is generating predictable, recurring revenue, which is more appealing than one-time sales.
Metrics to Use Alongside MRR
While MRR is a valuable metric, it’s even more powerful when used in conjunction with other key performance indicators (KPIs). Here are some critical SaaS growth metrics to track alongside MRR to get a complete picture of your startup’s financial health:
1. Customer Churn Rate
Churn Rate measures the percentage of customers who cancel their subscriptions within a given period. A high Churn Rate can severely impact MRR growth, making it essential to monitor.
Formula:
Customer Churn Rate = (Lost Customers / Total Customers at the Start of the Period) × 100
Importance for Startups:
For early-stage startups, reducing churn is crucial. By tracking Churn Rate alongside MRR, you can quickly identify issues with customer retention and implement strategies to keep churn low.
2. Customer Lifetime Value (CLV)
CLV measures the total revenue you can expect from a customer over the entire duration of their relationship with your business.
Formula:
CLV = ARPU × Customer Lifetime (in months)
Importance for Startups:
A higher CLV indicates that your customers are staying longer and contributing more to your MRR over time. Tracking CLV helps you evaluate the long-term profitability of acquiring new customers and informs decisions on customer acquisition costs.
3. Customer Acquisition Cost (CAC)
CAC measures how much you’re spending to acquire a new customer. For early-stage startups, understanding CAC is essential for evaluating the efficiency of your marketing and sales efforts.
Formula:
CAC = Total Cost of Sales and Marketing / Number of New Customers Acquired
Importance for Startups:
Ideally, your CAC should be significantly lower than your CLV, ensuring that you’re not spending more to acquire customers than they’re worth over time. Monitoring CAC alongside MRR allows you to gauge the efficiency of your customer acquisition strategies.
4. Net Revenue Retention (NRR)
NRR measures how much revenue you retain from your existing customers after accounting for upgrades, downgrades, and churn.
Formula:
NRR = (Starting MRR + Expansion MRR – Downgrade MRR – Churn MRR) / Starting MRR × 100
Importance for Startups:
NRR is an excellent indicator of how well you’re growing revenue from existing customers. A positive NRR (above 100%) means your customers are spending more over time, which is a good sign for sustainable growth.
5. Average Revenue Per User (ARPU)
ARPU measures the average monthly revenue generated from each customer.
Formula:
ARPU = MRR / Total Number of Customers
Importance for Startups:
ARPU is a useful metric for tracking how much value each customer is contributing to your business. If ARPU is increasing, it may indicate successful upselling and cross-selling efforts, while a declining ARPU could signal a shift toward lower-tier plans.
What Is a Good MRR Growth Rate?
A good MRR growth rate will depend on the stage of your business. Early-stage companies often aim for monthly growth rates of 10-20%. As your business matures, steady growth between 5-10% can still be considered strong. High churn or a stagnating MRR growth rate could indicate that your product is failing to resonate with your audience.
What MRR Doesn’t Measure
While MRR is an excellent metric for tracking predictable revenue, it has some limitations:
- One-time payments: MRR doesn’t include revenue from one-off services or sales.
- Profitability: MRR only measures revenue and doesn’t take costs or profitability into account.
- Customer churn causes: MRR won’t tell you why customers are leaving; you’ll need to dive deeper into churn analysis for that.
Ways to Grow Your MRR
If you’re looking to increase your MRR, here are some proven strategies:
- Customer acquisition: Attract new customers with effective marketing and outreach strategies.
- Upsell existing customers: Offer higher-tier plans or add-ons to existing customers to increase Expansion MRR.
- Improve customer retention: Reducing churn will have a positive impact on MRR. Invest in customer success and improve your product experience.
Example: A SaaS company offering a basic plan might introduce a premium plan with advanced features. By convincing existing customers to upgrade to the premium plan, the company could see a significant boost in MRR.
MRR FAQs
Q: What is the difference between MRR and ARR?
A: MRR refers to the revenue you generate monthly, while ARR (Annual Recurring Revenue) is the total revenue you expect to generate annually.
Q: Can MRR be negative?
A: While MRR itself cannot be negative, your Net New MRR can be negative if churn and downgrades exceed new and expansion MRR.
Q: Should discounts be included in MRR?
A: Yes, any discounts or promotional pricing should be accurately reflected in your MRR calculations.
Your Turn…
Understanding and tracking MRR is essential for any subscription-based business. By offering a clear view of your revenue streams, it helps you make data-driven decisions that lead to sustainable growth. Whether you’re focused on customer acquisition, retention, or expansion, MRR provides the financial insights you need to measure success accurately.
If you’re looking to grow your MRR, consider using the strategies outlined above. By focusing on improving your offerings, reducing churn, and expanding customer relationships, you can ensure steady, predictable growth for your business.
Looking for a Powerful Growth Marketing Strategy for Your SaaS Business?
At SaaSlaunchr, I specialize in creating innovative and results-driven marketing strategies tailored to boost MRR and growth for scaling SaaS companies. Let’s collaborate to take your business to the next level! Schedule a call with me today to learn more about how I can support your success.
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