What is MRR?
MRR, or Monthly Recurring Revenue, is an important financial metric in B2B SaaS. MRR represents the predictable, recurring monthly income from subscriptions and contracts. It helps you measure your revenue growth, make financial forecasts and make strategic decisions.
How do you calculate MRR?
Calculating MRR is quite simple and follows this formula:
MRR = Number of paying customers × Average monthly subscription price
Suppose your SaaS company has 100 customers who each pay €50 per month. Then the MRR is:
100 × €50 = €5,000 MRR
MRR can also be broken down into different components:
- New MRR: Income from new customers.
- Expansion MRR: Additional income from existing customers (for example, upsells or expansions).
- Churn MRR: Loss of MRR due to cancellations or downgrades.
- Net MRR Growth: The final growth of MRR after accounting for churn and expansions.
Example: Suppose you sign up 10 new customers this month with a €50-a-month subscription (New MRR = €500). In addition, 5 existing customers upgrade to a more expensive plan, which yields an extra €200 (Expansion MRR = €200). Unfortunately, 3 customers cancel, costing you €150 (Churn MRR = -€150). Your Net MRR Growth is then: €500 + €200 – €150 = €550 growth.
How do you apply MRR?
MRR is essential for strategic and operational decisions in your B2B SaaS company. You can use MRR for:
- Financial forecasting: Because MRR is a stable source of income, it helps you plan future expenses and investments.
- Growth assessment: By tracking your MRR growth over time, you can measure how fast your company is growing and whether your strategies are working.
- Investments and valuation: Investors and stakeholders often look at MRR to assess the financial health and potential of your company.
- Product and pricing strategy: Insights from MRR can help optimize pricing models and product offerings to maximize growth.
How do you improve the MRR of your SaaS?
Do you want to grow your MRR? Then you can apply various strategies:
- Acquire more customers: Improve your marketing and sales strategies to attract more paying customers.
- Minimize churn: Reduce customer turnover through better onboarding, customer service and retention programs.
- Upsell and cross-sell: Offer existing customers premium features, upgrades or additional products.
- Price optimization: Experiment with different pricing models to increase the average subscription price.
- Build better customer relationships: Establish a strong relationship with your customers by regularly delivering value and actively collecting feedback.
MRR is a fundamental KPI for your B2B SaaS company and provides insight into financial health and growth potential. By actively monitoring and optimizing MRR, you can increase your revenue and strengthen your market position.
What is ARR?
ARR, or Annual Recurring Revenue, is similar to MRR, but is calculated on an annual basis. ARR gives you insight into the total recurring income you generate on an annual basis from subscriptions and contracts. This is especially useful for companies with annual subscriptions or longer contracts.
How do you calculate ARR?
ARR is calculated as follows:
ARR = MRR × 12
For example, if your MRR is €5,000, then the ARR is:
€5,000 × 12 = €60,000 ARR
Just as with MRR, you can subdivide ARR into:
- New ARR: Annual income from new customers.
- Expansion ARR: Additional income from existing customers (for example, upsells or expansions).
- Churn ARR: Loss of ARR due to cancellations or downgrades.
How do you apply ARR?
ARR helps with long-term strategies and business growth. You can use ARR for:
- Annual revenue forecasts: By monitoring ARR, you can make accurate forecasts about the future financial health of your company.
- Contract value assessment: ARR is useful when evaluating the value of long-term contracts.
- Investment decisions: Many investors look at ARR to assess the stability and scalability of your SaaS company.
How do you improve the ARR of your SaaS?
To grow ARR, you can apply the same strategies as with MRR, but with an extra focus on:
- Offer longer contracts: Encourage customers to take out annual subscriptions instead of monthly subscriptions.
- Attract enterprise customers: Large companies often enter into long-term contracts, which increases your ARR.
- Increase predictable income: Create bundles and offers that encourage customers to make longer commitments.
Conclusion
MRR and ARR are both crucial KPIs for your B2B SaaS company. MRR helps with monthly strategies and cash flow management, while ARR provides a better picture of long-term sales and growth. By properly monitoring and optimizing these metrics, you can grow your SaaS more efficiently and attract investors.