How to Calculate MRR | Calculations & Equations
“Let’s dive deeper into learning how to properly calculate MRR (Monthly Recurring Revenue) for your SaaS company.”
Written By Sterling Sweeney: Published March 10th, 2020 | Updated March 10th, 2020.
Sterling Sweeney is a growth hacker and the driving force behind WhalePages, a SaaS marketing agency ⚡. Today, he explores one of the most important KPIs in the SaaS industry: MRR (Monthly Recurring Revenue).
23 Minute Read
“Learn how to properly calculate MRR (Monthly Recurring Revenue) for your SaaS company. 📈 “
In today’s tutorial we’ll explore what MRR is, three different ways to manipulate as well as how to calculate it while taking into consideration both churn and growth.
Please note that we will be referencing our MRR calculator as a guide to help us work through this tutorial. We suggest you open the calculator in a new tab now so you can follow along with our examples.
Now that we are on our calculator page, we’re going to start learning how to calculate MRR by playing around with some numbers.
For those of you who don’t know, MRR Stands for Monthly Recurring Revenue and it’s a common KPI (or Key Performance indicator) that SaaS companies use to help them keep a finger on the pulse of their company’s health at any given time. It’s one of the most important measurable values that SaaS founders consider when making business decisions.
MRR can be impacted in three different ways.
MRR will be influenced by many different factors. Often, when thinking about MRR most people automatically think about the importance of getting more users to sign up for your product. However, as we’ll see below, MRR is influenced by many other equally important factors. Let’s explore this in more detail now.
MRR can be impacted in three different ways:
1. New user acquisition.
2. User retention through either churn reduction / negative churn
.3. Pricing / monetization
Let’s look at each one in more detail now.
New User Activation
Imagine we onboarded 4 users our first month and each user was paying a $25 subscription fee. We’d be up to 100 in MRR during our first month.
Now imagine we were focusing only on new user acquisition and we onboarded 1 new user before the end of the month. We’d be up from $100 in MRR to $125 in MRR. from new user acquisition alone. So this is one way to increase MRR.
Next, User retention or churn reduction has an impact on MRR because the more users you’re able to retain, the higher your MRR will be in the future. For example, if after acquiring 5 users in our first month, if two of them churned we’d be down from $125 in MRR to $75 in MRR. This means we’d have to work extra hard with our new user acquisition strategies to make up for the loss due to churn each month.
The analogy of a leaky bucket 💧 is often used when talking about the relationship between new user acquisition and churn. If you have a leaky bucket, you need to work increasingly hard to continue to fill the bucket to make up for the water you’re losing through the leak.
As a SaaS company, you’ll find that repairing the leak will have even a bigger impact than new user acquisition when it comes to increasing your SaaS companies’s MRR.
Pricing / Monetization
Lastly, we have monetization as a strategy to improve MRR. Imagine for example that instead of 4 users paying $25 each month for a total of $100 in MRR, each user was paying $50 for the monthly subscription. If we had 4 users we’d have doubled our MRR and be at $200 in MRR by the end of our first month. Even if our conversion rate was lower due to our higher pricing, and we only onboarded 3 users, we’d still have a higher MRR at $150 each month.
However, pricing is a growth lever you need to test to find the sweet spot. For example, if after increasing your prices to $50 / month, you only got one new sign up, then your monetizaton strategy is effectively reducing your MRR.
Think Beyond the Lure 🎣 of New Users
Most SaaS companies are often hyper focused on new user acquisition, often at the expense of the other two levers. Yet the other two MRR control levers can have a bigger impact on a healthy MRR down the line.
So let’s play around with our MRR calculator to see how we can start to see how MRR works in its simplest form. Again, if you’re not already on our calculator page, please go here so you can follow along.
In its simplest terms MRR can be calculated by multiplying your SaaS product price by teh number of new subscribers you get each month.
However, most SaaS companies offer multiple pricing teirs. In this case, the best calculation to use is your ARPU (Average Revenue Per User) multiplied by the number of users you have.
Let’s jump into the calculator and look at some examples now. If we had a $100 / month SaaS product, and we onboarded 1 new customer / month, we would have $100 in MRR at the end of our first month.
If we continued onboarding one new customer / month for 12 months, at the end of 12 months we would have 12 customers paying $100 each / month each for a totally of $1200 in MRR.
MRR can also be easily converted to ARR (Annual Run Rate) by simply multiplying MRR by 12.
For example, We can multiply $1200 (our current MRR) by 12 months to figure out what our ARR will be. In this case it equals $14,400. In simple terms, this means our SaaS company, at this exact point in time, is making $14,400 / year.
We using our SaaS MRR calculator, you can simply use the “time slider” to increase the number of years, to see how your MRR changes over different time frames.
As you can see by the end of year two our MRR increases to $2400 and we’ve worked our way up to $28,000 in ARR. We’re not off to a bad start!
In the most basic terms, this is how we calculate MRR.
Here is Where MRR Gets Complex
However, MRR is more complex than this because it has forces pushing and pulling against it from many different directions.
For example, churn is a force that erodes your MRR month after month. Churn can take on many different forms (for example intentional churn like cancellations, or account downgrades OR unintentional churn like the inability to charge a user based on outdated payment information).
For example, at the end of our first year, if we had a 50% churn rate, no longer are we at $1200 in MRR. With a 50% churn rate we would only be at $600 in MRR.
As you can see, churn has a huge impact on a SaaS company’s bottom line.
YoY, MoM or WoW Growth
Next, to complicate matters further, there is another force that has a big impact on your MRR. And this is our growth rate. Some saas companies calculate growth on a weekly (WoW), monthly(MoM), or yearly (YoY) basis. In this example we’re using YoY (or Year over Year) growth to help us understand how growth cumulatively impacts our MRR.
For example imagine we have 0% growth. At the end of the second year we’d be up to 28.800 in ARR. However, if during this time, we experienced 7% YoY growth, our ARR would increase to 29,808.
Towards Exponential Growth
Now interesting things start happening when you start manipulating the different parts of this calculation.
Small increases in YoY growth (or new User acquisition), small decreases in Churn (or increases in retention) as well as small pricing increases (or monetization improvements) can have a huge impact on your MRR in 5 to 10 years down the line.
This is because growth compounds. The mathematics behind the SaaS business model allows us to add growth on top of growth 🌱. Essentially, getting good at manipulating these levers will allow you to engineer exponential growth. However, this isn’t easy and your numbers need to be optimized in order to make this happen.
So I encourage you to head over to our calculator and start inputting your numbers to see how small improvements across the board can ensure your SaaS company has the quickest growing MRR possible.
Written By Sterling Sweeney: Published March 10th, 2020 | Updated March 10th, 2020.
Sterling Sweeney is a growth hacker and the driving force behind WhalePages, a SaaS marketing agency So, if you have a SaaS company and you’re kinda into things like website traffic and increasing your MRR, then be sure to check out our homepage.
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