Simply put, monthly recurring revenue (MRR) is income that a business can count on receiving every single month - a predictable revenue! It's a consistent number you can use to track all of your recurring revenue over time, in monthly increments. Often this is a by-product of a subscription business - a service that is billed (and paid for) on a monthly basis. To calculate your monthly recurring revenue, you simply multiply your total number of paying users by the average revenue per user (ARPU).
Monthly recurring revenue is arguably the most important metric for subscription businesses - and something that investors (and Wall Street) love to see.
- MRR forms the foundation for the following finance functions:
- Calculating CLV (customer lifetime value) Projecting future revenue
- Assessing ASP (average selling price) trends
The monthly recurring revenue definition breaks down into the following:
- New MRR - Revenue that comes from new customer acquisitions.
- Expansion MRR - Expansion MRR is all about up-selling and cross-selling. Your ability to earn increased revenue from your existing customer base is key to a successful subscription business.
- Churn MRR - Revenue lost from churned customers - those customers who downgrade or fail to renew their subscriptions.
Subscription businesses with monthly recurring revenue operate in a way that is fundamentally different than traditional businesses. With a monthly recurring revenue model, companies typically manage customers and their subscriptions as they evolve from free or entry-level services into premium offerings over their lifetime: from try to buy, upgrade, and renew. Customers are the center of a subscription business, so key metrics are more often about customers than products. In addition to MRR, important customer-centered metrics include total active customers, total active subscriptions, and total contract value (TCV).
For more information about defining, calculating, and optimizing your monthly recurring revenue, download our free e-book!