With MRR, the current financial health of a business can be properly assessed. Moreover, projections of future earnings can be created on the basis of active subscriptions.
Monthly Recurring Revenue (MRR) is one of the most important financial metrics in the subscriptions business. It helps an individual or a company provide monthly financial estimates from subscriptions. Let us dive into details. It is the total revenue, which is predictable, that a business generates from all the active monthly subscriptions. MRR includes the following:
- Recurring charges resulting from discounts
- Recurring charges resulting from coupons
- Recurring add-ons
However, it does not include one-time fees.
With MRR, the current financial health of a business can be assessed appropriately. Moreover, projections of future earnings can be created based on active subscriptions.
Calculating MRR is a straightforward process that you will not find complex. All you have to do is to multiply the following:
MRR = Number of subscribers under a monthly plan * ARPU
(ARPU stands for average revenue per user.)
For example, let’s assume you have 5 subscribers on a monthly INR 300 plan. The calculation of MRR will be as:
(5* INR 300) = INR 1500
For annual plan subscriptions, the calculation will take place by dividing the annual plan price by 12. Afterwards, you will have to multiply the result by the number of annual plan customers.
For example, let’s assume that a customer subscribes to your product. The annual renewal agreement stands at INR 1200. Now, the calculation of MRR will be as follows:
INR 1200 / 12 = INR 100
Types of Monthly Recurring Revenue
This is the additional revenue whose generation takes place from the new customers. These new customers are secured during a specific month.
For example, the new MRR for 5 new subscriptions under the INR 500/month plan is as follows:
5 * INR 500 = INR 2500
This is the additional revenue generated from subscriptions that go from current to higher pricing plans over a particular month. Here, the add-ons are taken into consideration.
For example, suppose an existing customer has a subscription to a basic plan of INR 50/month. This customer is now upgraded to a standard INR 200/month plan and buys an INR 25/month add-on. In such a case, the upgrade MRR is as follows:
INR 200 – INR 50 + INR 25= INR 175
This refers to the reduced revenue from subscriptions whose movement has taken place to a lower plan from their existing plan over a particular month.
For example, if a higher subscription plan for INR 500 is downgraded by an individual to a basic subscription plan for INR 100, the Downgrade MRR shall be as follows:
INR 500 – INR 100 = INR 400
This refers to the additional revenue that is obtained from current existing customers. This is for a particular month in comparison to the previous month. The additional revenue generation takes place via cross-selling, upselling, and add-ons.
The calculation of the rate of growth in expansion MRR for a particular month is as follows:
(Expansion MRR in a particular month / Total MRR at the particular month’s beginning) * 100
For example, suppose that a business has MRR of INR 800K when the month begins. The business gains additional revenue of INR 17k of Expansion MRR during the month. This expansion MRR comes from current customers through cross-selling, upselling, and add-ons.
This is the total amount lost by a business because of monthly subscription cancellations.
For example, suppose 3 of your customers are paying INR 1000/month. All 3 of them cancel in the same month. Here, the churn MRR is INR 3000.
Net New MRR
This type shows the amount of growth or shrunk of revenue in a particular month in contrast to the previous month. The Net New MRR is calculated as follows:
MRR(New) + Expansion MRR – Churned MRR.
For example, 5 new customers, during the course of a month, subscribed to an organization’s service. Each of them paid INR100/month. Meanwhile, due to upgrading, 10 current customers moved to a higher-tier plan for INR 200/month from INR 100/month. However, 3 of the organization’s customers churned out. These 3 were each paying INR 200/month. In such a case, the Net New MRR for that month is as follows:
INR 500 + INR 1000 – INR 600 = INR 900.
MRR tells us how well a business is operating. Moreover, it also provides significant actionable insights into the growth of a particular business. For any subscription business, it is one of the most critical metrics in existence. To make the most of MRR, act now with PayU. Try the PayU recurring suite
The benefits of MRR are as follows:
It helps in tracking the business performance.
It is a suitable tool for forecasting revenue.
MRR predicts the recurring revenue for the business every month.
Revenue simply means income that is created from normal business operations. In contrast, MRR refers to the sum of all subscription revenue whose expression takes place as a monthly value.
MRR tells us about the amount of incoming revenue coming on a monthly basis for a subscription business. Its calculation takes place by multiplying the number of customers of an organization by their monthly subscriptions average.
A correlation between the customers and their accounts is established by MRR. This way, MRR tells us about the subscription behaviour of the customers.
A regular monthly revenue calculation does not consider the following two critical factors:
Subscription plan changes
Consequently, a misleading impression can be formed regarding the business’s financial health. This is not the case with MRR as it considers these two factors.