If you are involved in a SaaS business, you probably already know that Monthly Recurring Revenue (MRR) is one of the most important metrics to measure the health of your business. But did you know that MRR can be misleading if you don’t take into account Committed Monthly Recurring Revenue (CMRR)? Throughout this post, we will explain what CMRR is, how to calculate it and why it is important for your SaaS business.
What is CMRR?
Before defining CMRR, let’s start by reviewing the basics. The MRR refers to the amount of revenue your company generates in a given month from subscription sales. If your company has a subscription-based business model, MRR is likely to be the most important metric for measuring its success.
However, MRR does not take into account changes in revenue generated by existing customers. For example, if a customer who pays £100 per month cancels their subscription, the MRR will decrease by £100. Therefore, the MRR does not reflect the revenue your company can expect to receive in the future.
This is where the CMRR comes into play. The CMRR refers to the monthly revenue your company expects to receive from its customers during its life cycle. It’s a metric used in software-as-a-service (SaaS) companies that combines monthly recurring revenue (MRR) with known bookings and cancellation and rebate data. It is an important metric for understanding net subscription inflow and outflow and the financial health of the company. Therefore, the CMRR provides a more accurate picture of the revenue your company can expect to receive in the future.
If a company sells annual contracts, it can be calculated as CARR (Committed Annual Recurring Revenue).
How to calculate CMRR in your company?
The CMRR is based on monthly recurring revenue that has been recognized for accounting purposes. The term “recognized” refers to the accounting principle of revenue recognition, which states that revenue should be recognized at the time the related product or service has been delivered. Therefore, if a customer pays in advance in May, revenue will not be recognized until the product or service is delivered in the following month. It is important to consider this difference between recognized and unrecognized MRR in order to accurately calculate the CMRR.
Also, it is essential to consider that there is no universally accepted formula for the term CMRR, which means that your company has some latitude to use the most accurate metric to measure your data. However, most software-as-a-service (SaaS) companies employ a formula similar to the following:
CMRR = MRR + New Bookings + Expansion MRR- Churned MRR + Upgrades.
The first component is the MRR, which is the amount of recurring revenue normalized to a monthly amount. The second component is New Bookings, which is new business committed where both parties have signed the contract. The third component is Churn MRR, which is the rate at which a company loses subscribers. Finally, downgrades and upgrades are also considered in the formula, as they represent positive or negative changes in subscriber accounts. Together, these components provide an accurate view of a SaaS company’s committed recurring revenue.
CMRR or CARR?
Annual subscriptions are currently in vogue. As we discussed earlier, if we sell annual contracts we should use the CARR. The only difference with the CMRR is that instead of thinking in monthly terms, we think in annualized terms.
To understand the CMRR, which is used for those who bill monthly, let’s imagine it is May and we need to know the MRR (Monthly Recurring Revenue) recognized in April. Let’s say that number is £500,000. Since we closed the books for April, our sales and accounting teams have been receiving new orders, add-on requests, customer cancellation notices, among others.
To calculate the CMRR, we start with the MRR number recognized in April and then add all known new bookings, add-ons, downgrades and cancellations to have a “real time” MRR number. It is important to note that these new orders and cancellations have not yet generated revenue in our financials.
If we sell annual subscriptions, the methodology is similar, but we start with our base ARR (Annual Recurring Revenue) and add known bookings and cancellations. For companies with annual subscriptions, CARR is used to measure the exit rate of our future new business.
Both CMRR and CARR are important for companies that offer subscriptions and are used to measure recurring revenue and the financial health of the company. The main difference is that one focuses on monthly terms and the other on annual terms. Both are necessary to have a good understanding of a company’s financial condition.
Why is it important to know the CMRR?
Knowing the CMRR (Committed Monthly Recurring Revenue) in a software-as-a-service (SaaS) company can provide several important benefits:
- Future Revenue Prediction: By having a clear idea of the recurring revenue expected each month, the company can plan for future growth and set realistic goals for company growth.
- Identifying customer retention issues: CMRR is affected by customer churn and declines in engagement of existing subscriptions. By measuring CMRR on a regular basis, the company can quickly identify any customer retention issues and take action to address them.
- Financial health assessment: CMRR is an important indicator of a SaaS company’s financial health. If the CMRR is increasing, it is a sign that the company is growing and acquiring new customers. If the CMRR is decreasing, it may be a sign that the company is losing customers or not generating enough sales.
- Aids in strategic decision making: Knowledge of the CMRR can be useful in making strategic decisions, such as pricing, adding new products and services, and allocating resources. For example, if the CMRR is declining, the company can consider adding new features to attract more customers and increase engagement of existing customers.
CMRR forecasting is useful because it allows you to plan for future growth and set realistic goals. It also helps you identify customer retention problems and take steps to address them before they affect your revenues. In addition, it is a key factor in long-term financial planning, such as determining the need for external financing and planning operating and capital expenditures. Overall, CMRR forecasting is an important tool for any SaaS company that wants to be successful in the long term.
In order to carry it out we can follow these steps:
- Collect data: You will need to collect data on your past monthly recurring revenue. This will allow you to see growth trends and seasonal patterns in revenue.
- Identify key drivers: Once you have recurring revenue data, identify key factors that have driven growth in the past. This could include new subscriptions, price increases, product launches, etc.
- Evaluate the impact of key drivers: After identifying the key drivers, evaluate the impact each has had on CMRR growth in the past. You can use this information to forecast the impact of these factors in the future.
- Forecast future growth: With the data and key factors in mind, use a mathematical model or forecasting software to forecast future growth of the CMRR. This will allow you to estimate the monthly recurring revenue you can expect in the future.
With the collected recurring revenue and bookings data, you can easily calculate your company’s committed monthly recurring revenue (CMRR). Understanding CMRR is critical for any SaaS company looking for long-term success. By using this metric to evaluate your business performance and plan for the future, you can make more informed decisions and increase your chances of success in the competitive SaaS marketplace.