MRR (Monthly Recurring Revenue)

Definition

MRR (Monthly Recurring Revenue) is a fundamental metric for subscription-based businesses that measures the normalized monthly value of all active recurring revenue. It represents the predictable revenue the company can expect to receive each month, assuming no growth, churn, or changes in existing contracts.

The basic MRR formula is:

MRR = Sum of all active monthly recurring subscriptions

For example, if a SaaS company has 50 customers on a 100 euros/month plan and 20 customers on a 250 euros/month plan, MRR is: (50 × 100) + (20 × 250) = 10,000 euros.

For non-monthly contracts, MRR normalizes on a monthly basis:

Annual contract 12,000 euros: MRR = 12,000 / 12 = 1,000 euros/month
Quarterly contract 3,000 euros: MRR = 3,000 / 3 = 1,000 euros/month

MRR is crucial because:

Granularity: Monthly visibility allows rapid reaction to trends
Predictability: Forward-looking indicator of future revenue
Diagnostics: Decomposition into components (new, expansion, churn) reveals growth drivers
Operations: Guides day-to-day decisions on marketing, product, customer success

MRR emerged with the SaaS model in the early 2000s. Unlike ARR (Annual Recurring Revenue), used more for investor reporting and annual planning, MRR is a daily operational metric for internal teams. Early-stage startups (under 1M ARR) use MRR as primary metric; scale-ups (over 10M ARR) transition to ARR for simplicity.

How it Works

MRR calculation requires precision to accurately capture monthly business dynamics.

MRR Movement Components

MRR evolves each month according to this formula (MRR Movement or MRR Waterfall):

MRR_end = MRR_start + New MRR + Expansion MRR - Churned MRR - Contraction MRR

Where:

New MRR: Revenue from new customers acquired in the month
Expansion MRR: Upsell, cross-sell, upgrades from existing customers
Churned MRR: Revenue lost from customers who cancel
Contraction MRR: Downgrades or reduction from existing customers (they stay but pay less)
Reactivation MRR: Former customers who return (sometimes counted separately)

Example MRR Waterfall (January):

MRR start of month: 100,000 euros
New MRR: +15,000 euros (30 new customers @ 500 euros/month)
Expansion MRR: +5,000 euros (10 customers upgrade from 500 to 1,000 euros)
Churned MRR: -8,000 euros (16 customers cancel @ 500 euros)
Contraction MRR: -2,000 euros (4 customers downgrade from 1,000 to 500 euros)
MRR end of month: 110,000 euros (+10% MoM)

What to Include and Exclude

Include in MRR:

Recurring subscription fees (normalized monthly)
Recurring add-ons (additional seats, modules)
Recurring discounts applied (if permanent)
Trial conversions (from the day they become paying)

Exclude from MRR:

One-time fees: Setup, implementation, training
Professional services: Consulting, customization (even if recurring, it’s services revenue)
Variable usage-based revenue: Overage, consumption beyond minimum commit
Temporary discounts: Time-limited promos (remove when they expire)
Free trials: Count as zero MRR until conversion

Edge case - Prepaid annual contracts: Customer pays 12,000 euros upfront for 12 months. MRR = 1,000 euros/month (not 12,000 in payment month). Accounting-wise it’s deferred revenue, but operationally counts as stable MRR.

Metrics Derived from MRR

MRR Growth Rate: ((MRR_end - MRR_start) / MRR_start) × 100. Early-stage SaaS benchmarks: 10-20% MoM is hypergrowth, 5-10% is strong growth, under 5% requires optimization.

Net MRR Churn Rate: ((Churned MRR + Contraction MRR - Expansion MRR) / MRR_start) × 100. Negative (expansion exceeds churn) is ideal. Best-in-class SaaS: -5% to -10% (negative churn).

Quick Ratio: (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR). Measures growth efficiency. Over 4x is excellent, under 1x indicates shrinkage.

MRR per Customer (ARPU - Average Revenue Per User): Total MRR / number of customers. Track trend: Growing ARPU indicates successful upsell/pricing power.

Use Cases

Early-Stage Growth Tracking

A SaaS startup in its first 24 months uses MRR as North Star Metric. Monthly dashboard shows:

Month 1: MRR 5,000 euros (10 customers) Month 6: MRR 25,000 euros (40 customers) - 5x growth, +32% MoM average Month 12: MRR 80,000 euros (120 customers) - 16x growth year 1 Month 24: MRR 250,000 euros (300 customers) - 50x growth from inception, ~3M ARR

MRR growth velocity guides fundraising decisions. At 100K MRR (1.2M ARR) the startup can target Seed round. At 250K MRR (3M ARR) can target Series A.

Customer Success Prioritization

Segmenting MRR by cohort and health score allows prioritizing interventions. Example:

High MRR at-risk (10 customers, 50K MRR, red health score): Assign dedicated CSM, executive outreach.

Low MRR power users (30 customers, 15K MRR, high engagement): Target for upsell, case studies.

Negative MRR trajectory (Dec 2024 cohort: MRR dropped from 20K to 15K in 3 months): Analyze churn drivers, product gaps.

Pareto rule: Often 20% of customers generate 80% of MRR. Protecting these customers is critical.

Pricing Experimentation

A SaaS tests new pricing tier. Before test:

Starter: 50 euros/month (200 customers) = 10K MRR
Pro: 200 euros/month (100 customers) = 20K MRR
Total MRR: 30K euros

Introduces Enterprise tier (1,000 euros/month) and increases Pro to 250 euros. After 3 months:

Starter: 50 euros/month (180 customers, -10% churn) = 9K MRR
Pro: 250 euros/month (90 customers, 10 upgraded to Enterprise) = 22.5K MRR
Enterprise: 1,000 euros/month (15 customers, 10 upgrades + 5 new) = 15K MRR
Total MRR: 46.5K euros (+55% in 3 months)

Insight: Starter churn acceptable if compensated by Enterprise. ARPU increased from 150 to 174 euros.

Sales Comp and Target Setting

Sales teams are incentivized on New MRR (new customers) and Expansion MRR (upsell).

Comp scheme:

Base salary: 60K euros
Commission: 20% of annualized New MRR (MRR × 12) + 15% of annualized Expansion MRR
Monthly quota: 10K New MRR (120K ARR)

If sales rep closes 12K New MRR in a month:

Commission: 0.2 × (12K × 12) = 28.8K annualized → paid ~2.4K in the month
Over-quota bonus: +10% additional

Daily MRR tracking allows adjusting sales activities in real-time (e.g., push enterprise deals end of quarter to close gap).

Forecasting and Scenario Planning

MRR enables precise projections. Simplified formula:

MRR_future = MRR_current × (1 + growth_rate - churn_rate)^months

Scenario: Current MRR 100K, growth 10% MoM, churn 5% MoM.

Month 3: 100K × (1 + 0.10 - 0.05)^3 = 116K
Month 6: 100K × (1.05)^6 = 134K
Month 12: 100K × (1.05)^12 = 180K

This assumes constant growth and churn. Advanced models use cohort-based forecasting (churn varies by cohort age) and segmentation by customer type.

Practical Considerations

MRR vs Cash Collected

MRR is an accrual metric (not cash-based). Customer with annual contract of 12K paid upfront contributes 1K MRR/month, but cash flow is 12K in month 1.

For cash management, need separate tracking:

Billed MRR: Invoiced in the month (can be lump sum for annual contracts)
Cash Collected: Collected in the month (includes DSO - days sales outstanding)

A company can have growing MRR but cash burn if customers pay slowly (high DSO). Best practice: Offer discount for annual prepay (e.g., 10% discount) to improve cash flow.

Handling Mid-Month Upgrades and Downgrades

If customer upgrades mid-month, how to count MRR?

Approach 1 (Full month impact): Count entire upgrade from 1st of month. Pro: Simplicity. Con: Overstates Expansion MRR.

Approach 2 (Prorated): (Remaining days / total days) × new MRR. Pro: Accuracy. Con: Complexity.

Approach 3 (Next month): Upgrade counts from start of next month. Pro: Simplicity. Con: Delays recognition.

Best practice: Approach 1 for early-stage (simplicity), approach 2 for scale-ups (accuracy). Tools like ChartMogul, Baremetrics automate this.

Multi-Currency and Internationalization

For global SaaS, MRR in multiple currencies complicates aggregation. Approaches:

Reporting currency: Convert everything to EUR (or USD) at day’s exchange rate. FX variation creates noise (MRR can grow/drop due to FX, not business).

Constant currency: Use fixed exchange rate for comparisons. Separate MRR growth from FX impact.

Example: US MRR is 100K USD (90K EUR at rate 0.9). Month later: 105K USD but EUR strengthens (rate 0.85 → 89.25K EUR). EUR MRR appears down but it’s FX effect. Report: “+5K USD constant currency, -0.75K EUR FX impact”.

MRR Quality and Contract Terms

Not all MRR is equal. Quality factors:

Contract length: Annual contracts more stable than month-to-month
Prepay: Annual prepay has lower churn (commitment)
Concentration: Distributed MRR (no customer over 10%) is safer
Customer type: Enterprise MRR has lower churn than SMB MRR

A company with 500K MRR from 500 SMB (1K each, 30% annual churn) is riskier than 500K MRR from 50 enterprise (10K each, 5% annual churn).

Common Misconceptions

”MRR is the Most Important Metric”

MRR measures revenue but not profitability or efficiency. Need to balance with:

CAC Payback: Time to recover Customer Acquisition Cost. Formula: CAC / (ARPU × Gross Margin). SaaS benchmark: Under 12 months.

LTV/CAC Ratio: Customer Lifetime Value / CAC. Target: Over 3x. A company with growing MRR but LTV/CAC under 1x is burning capital unsustainably.

Burn Multiple: Net Burn / Net New MRR. Measures how much cash burned to generate 1 euro of MRR. Under 1.5x is best-in-class.

”MRR and Accounting Revenue are the Same”

No. GAAP revenue follows accrual accounting with precise rules (ASC 606 / IFRS 15). MRR is a non-GAAP operational metric.

Differences:

Timing: MRR counts annual contract as monthly MRR immediately. GAAP recognizes revenue monthly via deferred revenue.
One-time: 10K setup fee is GAAP revenue (recognized when delivered), not MRR.
Discounts: Multi-year discount is allocated differently in GAAP vs MRR.

For investor reporting, present both. Public SaaS report GAAP revenue (mandatory) and disclose ARR (not MRR, too granular) as supplementary metric.

”High MRR Growth Means Healthy Business”

MRR can grow with hidden churn. Example:

Month 1: 100K MRR Month 2: 110K MRR (+10% growth)

New MRR: +25K
Expansion MRR: +5K
Churned MRR: -15K
Contraction MRR: -5K

Gross churn is 20K (20% of base), masked by 30K new + expansion. This is unsustainable: Need to acquire 20K+ MRR/month just to stay flat. Leaky bucket problem.

Best practice: Monitor Net MRR Retention (NRR) separately. NRR under 90% indicates structural problem (product-market fit, customer success).

ARR (Annual Recurring Revenue): Annualized version, used for investor reporting and planning
Churn Rate: Customer loss rate that erodes MRR
CLV (Customer Lifetime Value): Total customer value derived from MRR and retention
CAC (Customer Acquisition Cost): Cost to acquire new MRR, to balance with LTV