How to calculate SaaS MRR: Formula, calculation & best practices

MRR (Monthly Recurring Revenue) is a fiscal metric that assesses and predicts monthly revenue of a SaaS business. It outlines information such as discounts, recurring revenue, and upgrades. 

According to Statista, ADT, the leading electronic security system in the United States, generated a substantial amount of recurring revenue in 2023, bringing in 353 million U.S. dollars each month.

Although calculating and interpreting MRR in SaaS is a hustle, it is a crucial component of tech enterprises, and you must use it when measuring their growth.

So, what exactly is MRR, its types, and how do we calculate it? Let's find out.

What is MRR in SaaS?

Monthly Recurring Revenue (MRR) is a key metric in the SaaS industry that measures the predictable income a company earns from customers each month.

‍MRR helps SaaS companies forecast future revenue, analyze growth patterns, and develop informed strategies.

The primary function of MRR is to outline the monthly recurring income that a company expects from its clients. It includes all revenues collected through service fees, subscription plans, and other payments.

Businesses assessing their financial stability should invest in MRR services since they focus on regular income rather than single transactions. 

This move is essential as it allows accounting teams to track their recurring revenue, especially for businesses that rely on subscriptions to improve their revenue pool.

Further, this article will provide insight into types, how to calculate, importance, and other factors related to MRR in SaaS.

Different types of MRR in SaaS

MRR is a metric that can be integrated into distinct classifications to understand the subtleties of business health, revenue growth, and customer behavior.

Listed below are different types of MRR in SaaS: 

• New MRR: revenue earned from new clients.
• Net new MRR: the accumulated revenue equated to the recent amount.
• Expansion MRR: contract add-ons, upsells, and cross-sells.
• Upgrade MRR: any revenue collected from subscribers who have paid a higher price than the normal.
• Contraction MRR: revenue a business loses when clients cancel their subscriptions or when there is downtime.
• Downgrade MRR: low income from subscriptions due to reduced prices.
• Reactivation MRR: all clients who opted back to their paid plans.
• Churn MRR: the total income that a business loses when clients cancel their subscriptions.

NOTE: These metrics should not be confused with revenue recognition. MRR and revenue collection calculations are different.

Also, there is no recommended way to estimate MMR in SaaS, as companies must find the best computing format to monitor their clients.

So how do we calculate it?

How to calculate SaaS MRR?

Consider the following when calculating MRR:

• Duration of the contract
• Any mid-contract changes regarding renewals and early upgrades

Due to these factors, it is advisable to calculate MRR contractually using the steps outlined below:

1. Basic MRR formula

This method is the most preferred by accounting and management teams globally because it is concise:

MRR = Number of customers x Average Revenue Per User (ARPU)

Example: say your business has 10 subscribers who pay about $90 monthly for your service, then: MRR = 10 x $90 = $900

2. MRR for the beginning and end of the month

Scenario: A business signs an annual contract of $120,000 that should begin on 1st May 2023 and end on 30th April 2024, but they do not renew the contract.

• Question: What is the total MRR amount for the contract period, and when was it added?
• Answer: $10,000 on 1st May 2023
• Question: What amount of MRR was lost and when?
• Answer: $10,000 on 1st May 2023. It is easier to say that the loss happened on 30th April 2024 since it is the last day, but doing so means the company lost and gained $10,000 within a year.

3. MRR when calculating mid-month stats

Scenario: A company signs an annual contract that starts on 15th May 2023 and ends on 14th May 2024, but does not renew the contract.

• Question: What amount of MRR was added and when?
• Answer: $10,000 in May 2023
• Question: What amount of MRR did the company lose, and how much?
• Answer: $10,000 in May 2024, especially after the company failed to renew the contract.

4. MRR for gaps in contracts

Scenario: A company’s $120,000 yearly contract begins on May 8th, 2023, and ends on May 7th, 2024.

However, gap contracts due to negotiations renew the contract for $120,000 from June 25th, 2023, to June 24th, 2024.

• Question: What was the new MRR, and when was it added?
• Answer: $10,000 on 8th May, 2023
• Question: What was the MRR and when was it renewed?
• Answer: There is no definite answer to this question because there are multiple calculation methods. You can consider the non-renewal in May 2024 and the renewal in June 2024. This means that its open-renewal was in May and closed in June. 

5. MRR for early renewals and upgrades

Scenario: A customer signs an annual contract of $120,000 set to start on 16th May, 2023, and end on 15th May, 2024.

The client then upgrades their renewal before the subscription expires on 30th December, which activates on 10th January and expires on 19th September 2024.

• Question: What was the total MRR, and when was it added?
• Answer: $10,000 on 16th May 2023.
• Question: How much MRR was upgraded and renewed?
• Answer: This answer depends on you. You must curve your MRR rules to the best ability and ensure you consistently track and record all transactions. 

The importance of tracking MRR 

Take a look at how companies use MRR to improve the trajectory of their companies:

• Revenue growth evaluation of new contracts, even from those with dissimilar expiry dates.
• Reporting on the impact of existing clients on boosting net gross.
• Outlining the trends that affect the average selling price.
• Assessing and calculating client’s lifetime value.
• Approximating projects that might impact GAAP (Generally Accepted Accounting Principle) revenue.

SaaS metrics and GAAP revenue are two distinct themes in the business.

MRR is calculated monthly based on the total number of subscriptions available; while GAAP revenue is a data calculation model that analyzes start and end subscriptions.

Best strategies to increase SaaS MRR

1. Review your pricing plans

Revisit your subscription plans, be it net new MRR and churn MRR, as they can limit the success of your business.

‍Reviewing your prices will give you insight into whether you are under or overcharging your clients.

Additionally, look at what your competitors  offer their clients to see if you can borrow tips.

2. Improve your client base

Clients dictate your income pool, and investing in returning clients is the first step to improving your MRR.

For this, you can read financial books, look for mentors, or visit different businesses to see how they do it.

3. Reduce your churn rate

Reducing your company’s churn rate is critical because it helps combat the issue of lost revenue and improve your client base.

With new customer retention plans, your MRR metrics will soar.

4. Offer cross-sells and upsells

If you want to improve your revenue, consider cross-selling or up-selling to encourage your clients to add to the pool of services that your business offers.

How to maximize profitability with SaaS gross profit margin?

Learning critical financial metrics is vital for your business's long-term success and profitability. 

Best practices for analyzing and calculating MRR

Making mistakes during MRR calculations will cost your business hefty losses.

If left unattended, it might push you out of the market. Here are some strategies to ensure you maintain correct calculations:

1. Double-check for non-monthly billing intervals

Accounting teams often report annual, quarterly, and semi-annual contracts as single-month payments.

‍If a client decides to pay for a full membership, it should be separated according to the months and pre-paid for a more accurate MRR.

2. Include discounts and coupons

If you fail to provide the discounts subscribers should enjoy, you may lose out on wooing new clients.

Even if your business offers minimal deals throughout the year, you must incorporate them in the final revenue collection to match your MRR report.

3. Incorporate MRR components

Always cover the various MRR elements that could refine your company’s image to the public.

Some of them comprise net new MRR, contraction, and reactivation MRR. 

4. Do not add non-recurring leads and trial revenue

Do not include one-time purchases or any non-recurring in your MRR calculations.

If your company has a trial period, do not add it to the metrics unless its subscription has ended. 

Helpful tools and software for MRR tracking 

Tracking MRR using tools and software is integral for subscription-based companies, particularly those in the e-commerce and SaaS niches.

‍Some key analytics MRR tracking tools offer advanced forecasting, subscription metrics, and revenue recovery.

Below are some advantages of integrating MRR tracking tools:

• Track multiple SaaS metrics that are crucial to your business
• Offer clients accurate and concise data pertinent to their business
• Discover why your company is experiencing a high churn rate
• Recover lost revenue by understanding how subscription works
• Maximize revenue using the recover tool feature
• Assesses SaaS subscription metrics
• Analyzes, imports, and organizes data from the company's billing sites
• Segment data

Key features of tools and software for MRR tracking

• Accumulates data
• Aligns your company data with global financial protocols
• Offers dedicated subscription analytics services
• Analytical features like calculating gross margin, and customer lifetime value to help your business grow its revenue and pool more clients 
• Breaks down various subscription metrics, such as downgrades, upgrades, current customers, and MRR
• Intuitive features like building your own integrations, monitoring customer churn rate and the engagement score that boost user experience

5 points to consider when looking for revenue analytics tools

Given the multiple revenue analytics software tools available, you must find the perfect MRR metric that caters to your business needs.

Before purchasing an MRR tracking tool, consider the following pointers:

1. Budget: Your preferred tool must be affordable and within your budget. Also, its features must align with your budget.
2. Scalability: You must consider if the software can improve your business for better revenue growth.
3. Preferred features: The software must have detailed features such as comprehensive analytics and other metrics. Also, find a tool with insights that will skyrocket your revenue.
4. Data accuracy: Most software does not guarantee clients accurate data due to the influx of users. Before purchasing any software, read its reviews to ensure it provides accurate data.
5. Transparent pricing: If the software has too many or unclear pricing models, it may affect your budget plan. To avoid this, find software with transparent pricing options. 

Key SaaS metrics you must track

Key SaaS metrics help businesses looking to find growth opportunities and improve their client pool.

Analyzing all your company’s data is a hassle, so utilizing key SaaS metrics is imperative. Below are some metrics to consider as a company:

1. Revenue metrics

Revenue metrics are critical for a company because they examine three essential aspects, including Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Average Revenue Per User (ARPU), and churn rate: 

• MRR: refers to the cumulative income of businesses and helps them make the effort to improve their businesses.
• ARR: it is a company’s income generated from annual recurring subscriptions.
• CAC: a metric companies use to approximate how much they will spend to win new clients.
• APRU: the total income generated by users over time.
• Churn rate: the clients who do not renew their subscriptions.

2. Customer satisfaction metrics

Customer satisfaction is crucial for businesses looking to improve their customer pool.

Some of the metrics you can use to enhance your customer service include:

Net promoter score (NPS)

NPS is a common metric businesses use to assess customer satisfaction and loyalty. It determines the chances a client will recommend a service or product to others. 

Benefits

• Easy to use.
• Tests customer loyalty.
• Provides companies with actionable feedback.

Customer satisfaction (CSAT)

Customer satisfaction is a KPI businesses use to ascertain how clients interact with their services or products.

Benefits

• Offers direct feedback on diverse customer interactions.
• High response rates.
• Provides actionable data.
• Has simple and intuitive features.
• Is a benchmarking tool.
• Fosters a customer-centric culture.
• CSAT surveys are scalable and cost-effective.

Customer effort score (CES)

Customer effort score is a metric businesses use to measure how easily clients interact with their services and the efficiency of their consumer service.

Benefits

• Assesses customer loyalty.
• Focuses on customer experience.
• Offers businesses actionable insights to improve their operations.
• Offers real-time feedback.
• Aligns business objectives with customer expectations.
• CES surveys are affordable even for startups.

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Find out more details about SaaS metrics. Learn what they are & how to measure them.

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Looking to maintain a healthy MRR?

Calculating and interpreting MRR is key to understanding your SaaS business's scalability and health. Improving your cashflow and revenue with flexible financial options that align with your goals is an essential component in development. 

Stenn helps you maintain liquidity with its financing options while maintaining accurate MRR projections and managing receivables, propelling your company's expansion.

Want to grow without giving up control? Improve your fiscal strategy with Stenn's financing solution to achieve growth.