What is MRR – If you are a SaaS founder, then generating MRR is the key for growth. As a business, having profitable months always seem good. It boosts your confidence, and the business wheels keep on turning. But having a profitable month is not merely enough. That’s because when it comes to business, you can never predict what the outcome will be the very next month.
The key to running a successful business is sustainability. If you want to sustain your business, you need to ensure that enough revenue comes in to keep it running every month. As we said earlier, there is no way for you to predict the nature of your profits which is why you need to secure MRR.
What is meant by MRR?
What is MRR – If you want to keep running your business smoothly, then you need to measure the MRR and make sure that it remains steady. But first, we need to know what MRR is?
The MRR is an acronym for Monthly Recurring Revenue. It refers to the minimum fixed amount of income that your business gains every month. This gives you the baseline for calculating the profits for the upcoming months in advance. It’s essential to ensure that the MRR refers to any revenue or payments that keep occurring and not just the sales. These remain fixed and do not change due to changes in other factors like time and other social conditions.
You can quickly determine your present MRR by subtracting all the variables from your total revenue for the month. Take your total income and subtract everything that is one time and not recurring or fixed. What you are left with is the MRR of your business for that month. Calculating it is not as easy as it sounds, and you can make some pretty common mistakes. So, the method to measure MRR is explained in detail below.
Calculating your MRR
What is MRR – Knowing your MRR is vital for business growth, so you need to learn how to do it. There are two ways of calculating your MRR. Your MRR will depend on which method you choose. The two methods differ in their approach; the first one is an average revenue per account calculation and a customer to customer basis. Let’s have a detailed look at both methods.
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The average revenue per user
Average revenue per account is the simplest calculation. You need to take the average revenue you gain per month from a single customer and multiply it with the average number of customers you get every month. As you can see that this is the simplest way of calculating your MRR, but the issue is that the result is very approximate and has less accuracy. The number of customers you get every month can vary greatly, so this cannot be used for important decisions.
Customer-by-customer
Customer to customer is the second method for calculating your MRR. This process is more accurate than the previous one, and that means it is long and time-consuming. This is the exploded version of the previous system. In this method, you calculate the total revenue collected from each customer and add it together to get your customers’ monthly revenue.
Customer to customer is a long process, but the results are more accurate. Once you have gotten the MRRs for a few months using this method, you can average them to get the base MRR for your business. This will be more accurate than the data you obtained using the previous method.
Why is MRR so crucial for SaaS?
What is MRR – You have come to know what MRR is and how you can calculate it for yourself till now. But the real question in your mind is why the MRR so crucial for your SaaS. The simple answer to that question would be that the MRR is the most important metric for analyzing a subscription-based business. If your business runs on subscriptions or any form of recurring customers, this is undoubtedly very important.
The difference between SaaS and other businesses is that you are providing continuous service and not just making a one time sale. So just calculating a monthly profit is not going to help. You need the MRR data to optimize your service that you are providing to the customers. Many things are associated with these businesses, like updating the consumer data, keeping track of the service provided to the existing customers, and many more. To ensure that all these keep running smoothly, you need to keep track of the MRR.
How MRR Means Sustainability?
What is MRR – Sustainability is a crucial factor when it comes to a subscription-based business. In these businesses, the revenue and the profits should form a continuous inflow, unlike typical businesses. So, knowing your MRR is helpful to gauge the performance and the growth of your SaaS.
When it comes to sustainability, it is tough to predict. But when you know your MRR, you can easily predict whether you have enough revenue or profit to keep your SaaS running or not. If you see some problem, then again, the MRR can show you the reason of the dip in your profits. Keeping knowledge about your MRR indirectly makes sure that your SaaS business has the sustainability.
How to measure the MRR?
What is MRR – So far, you have a pretty good understanding of what is the MRR and why it is essential for your business sustainability. You also know how to calculate your MRR, but that is not enough. The calculation method is just the primary step to know your present MRR. However, for growing your business, you need to monitor the changes in the MRR, and for that, you need to perform three extra calculations.
Those three calculations are:
- New monthly revenue
This is just the same as the name suggests. This is the MRR that you calculate from the revenue from the new customers you gained in the present month.
- Expanded monthly revenue
This refers to the additional revenue that is generated by the existing customers. When your existing customers add new things to their subscription or upgrade to a higher plan, the MRR is calculated.
- Lost monthly revenue
Calculating the new and additional revenue isn’t enough. You need to know the losses in the MRR as well. There are always some customers who cancel their subscriptions or downgrade their plans. These will be classified as the losses, and you need to calculate the MRR for them.
Once you have all these three calculations done, you can put them together and see whether your business has grown or suffered some setbacks. This is the importance of knowing and calculating the MRR for your business.
If you are running a SaaS business and want to take it to the next level, then start measuring your MRR right now.
