MRR SaaS: What is and how to measure it?

MRR is a SaaS metric that plays a key role in the study of a SaaS company. Undoubtedly, it is another of the kpis that offers an approximation of the current status of the company, providing a useful tool for analysis and decision making.

In this article you will find the necessary information to learn what MRR is, how to calculate Mrr and its classification.

What is MRR?

MRR stands for Monthly Recurring Revenue. As the name suggests, this metric represents the normalization of all recurring revenue shown in a monthly amount.

In SaaS companies, the MRR metric is an essential factor when assessing the health of the business. Especially, companies that have a subscription-based business model take MRR as a key indicator to analyze revenue performance.

The importance of the mrr saas metric is that it is not just a number, it is an indicator that encompasses different factors for its definition and offers a fairly broad picture for performance analysis.

Types of MRR in a Saas

The MRR of a saas is a great metric to establish a relationship between customers, their accounts and the behavior they have regarding the product.

The increase or decrease of MRR can mean different things and the best way to understand the real reasons for these changes is through the different types of MRR. Thus, it is possible to separate the monitoring to give you a more specific analysis. Some of these are:

New MRR

Refers to new recurring revenue generated from new customers arriving during the current month. 

Expansion MRR

This is the additional revenue that is generated from existing customers from the previous month who have switched to a higher plan or signed up for crosselling products. Typically, this revenue reflected in the expansion MRR comes from additional sales or product add-ons.

Undoubtedly, this metric is a good way to evaluate customer satisfaction by retaining customers and, in addition, increasing revenue through an additional sale. At the same time, it is healthy for the company because it represents an increase in sales without investing in new customer acquisition.

Contraction MRR

As its name suggests, it is the antonym of MRR above. That is, it refers to the reduction in revenue produced by customers who changed their subscription to a lower value subscription for a specific month.

Reactivation MRR

This is the revenue obtained from customers who previously abandoned the service and come back to resume their plan. Of course, this MRR is a good indication that your company is competitive in the market in which it operates.

How is the MRR calculated?

The MRR calculation is quite simple at first glance. However, its analysis must be careful to fully understand what it represents for the business.

The net new Mrr for the month is the metric that gives us the most information about SaaS growth. This is the result of the sum of the New Mrr, the expansion Mrr, the reactivation Mrr and from this figure the contraction Mrr and the abandonment Mrr must be subtracted.

Thanks to this result you can know if there is a loss or gain of money. In fact, the equation facilitates the understanding of this metric which is summarized in that if the sum of the New Mrr and the expansion Mrr is less than the churn Mrr there will be a loss of money.

On the other hand, there are particular ways to calculate the different types of MRR reviewed above:

  • New MRR: the number of new customers is multiplied by the average revenue of each account.
  • Expansion MMR: add all revenues that meet the definition of expansion and divide that result by the total MRR. Finally, multiply by 100 to obtain a percentage result of the expansion MMR.
  • Reactivation MMR: the number of new customers is multiplied by the average revenue of each account, provided that they meet the definition of reactivation.
  • Contraction MMR: this indicator should be calculated according to the particular case of contraction.   

Tips for growing MRR

Calculating mmr is just the beginning of the analysis and study process behind this issue. It is important to understand when to take the right actions that will grow mrr saas metric and here are some helpful tips for when you need to do so:

Charge more for your service

This is an obvious but very useful tip. It’s common to come across companies that undervalue their product and charge much less for fear that customers will abandon their proposal or reject their offer.

However, it is wise to evaluate how valuable your product or service is to customers. If it’s a solution to problems, a time saver, and an increase in their productivity, they’re unlikely to risk abandoning you.

Don’t lose sight of the medium plan

Having a free version of your product or service will open the door to a lot of customers. For starters, more people using the product or service means more chances to sell, the important thing is to know how to convert those free version users into frequent paying customers.

It’s a good idea to give them a glimpse of what the software can become if they pay a subscription or buy the product. This way, they will have already tasted the value of what they are about to buy and their willingness to pay is much greater.

Sells add-ons and additional features

It is easier and less expensive to sell to those who already have a relationship with the product or service. In that sense, an efficient way to grow the MRR is to give it more value through additional features or add-ons that have a cost.

In this way, offering other add-ons or additional features that can give customers more solutions translates into an increase after each attempt to calculate mrr.

There are different ways to do this, including applying a model by number of users, by level of usage, or offering additional feature packages. In any case, they all boil down to selling more to existing customers in order to increase MRR.

You can use our tool, if you need track and calculate MRR and other Saas kpi´s.