Essential Components for Accurate Monthly Recurring Revenue Calculation in SaaS
Monthly recurring revenue (MRR) is not just a stepping stone for a SaaS business but crucial reporting. Calculating it lets you see your business's trends and helps you forecast. When a customer pays you monthly, it is best to calculate the revenue MRR, a method that provides a comprehensive view than the cash methodology. However, it's important to note that some customers will opt for a quarterly, semi-annual, or annual plan. You should remember bringing annual plan clients will help you control your churn. The focus should also be on such clients without worrying about MRR calculation.
Understanding MRR for all types of customers is not just crucial, it's empowering. By dividing the MRR for such customers by the months they have opted for the plan, you can get a close-to-accurate picture of profit trends. Let's delve into the components essential for accurate monthly recurring revenue, empowering you with the knowledge you need to make informed decisions for your SaaS business.
Let's start with the Baseline: MRR at the Beginning of the Month.
The MRR at the beginning of the month is the MRR at the end of the previous month. Certain MRRs are calculated before you calculate a month's MRR. As you read the following paragraph, you will learn about it. However, the MRR at the beginning of the month is the sum of the previous month's MRR and the net new MRR.
Important Note: Accurately calculating MRR is vital for understanding your SaaS company's financial health. Ensure you include all relevant components, such as churn and subscription changes, to get a clear picture of your recurring revenue and make strategic decisions for growth.
Incorporating New MRR from Newly Acquired Customers
The payment you receive from all new customers in a month is the latest monthly MRR. However, this is not a net new MRR. Net new MRR is the sum of new MRR from new customers, account expansions, and reactivations. This 'net new MRR' is a key metric in understanding your business's growth and should be a focus in your MRR calculations.
Adding MRR from Customer Reactivations & account expansion
Customer reactivations play a pivotal role in balancing your monthly MRR. As SaaS growth is proportional to customer retention, customer reactivations should be a key focus for marketers. The payment you receive from previous customers is not only revenue but a testament to the quality of your SaaS product, reassuring you of the growth potential.
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Account expansions can include situations where a customer upgrades their plan, adds additional features, or increases their usage, all of which contribute to an increase in MRR.
Calculating the Impact of Downgrades on MRR
Downgrades play an essential role in MRR calculation. They significantly impact monthly MRR when no significant new customers or account expansions exist. Understanding downgrades would help because they fluctuate your MRR. I will share some scenarios regarding downgrades on MRR that will help you understand their impact.
- If your MRR downgrades are higher than usual and you acquire a regular number of customers, the monthly MRR will significantly decrease.
- If you acquire a regular customer in a month, MRR downgrades are standard, and the account expansion increases, you will have a positive MRR.
Accounting for MRR Loss from Churned Customers
You will have to identify the reason behind the cancellation. Maintaining customer data is not hard if you have a team.
Understanding and Measuring MRR Churn
Understanding and Measuring MRR Churn is crucial to managing your SaaS business. MRR churn is no different from customer churn. However, the calculation is different. MRR churn is the total lost MRR divided by MRR at the beginning of the month multiplied by 100. It is better not to add MRR from downgrades to the lost MRR. These insights from MRR will help you prepare you to improve your business.
- If you lose a high-paying customer, your lost MRR churn percentage will be higher even if customer churn is lower.
- If your customer churn is higher and you lose low-volume accounts, the MRR churn will be lower.
Tracking MRR Trends for Financial Forecasting
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- You should closely monitor the revenue lost by cancellations and downgrades. Recognizing the churn helps you understand the pattern, and you can work on revenue losses.
- Seasonal trends and preparation for it will help you forecast financial tracking.
Best Practices for Maintaining Consistent MRR Growth
- In the first paragraph, I mentioned a semi-annual or annual plan. Acquiring such customers reduces churn. The ideal way to achieve this is to offer some discounts. You can offer them a discount based on the period.
- Marketing should be the priority. Regardless of your size, marketing, and sales activity to acquire new customers should always be the priority.
- Innovation is essential. If your product is outdated, there won't be growth. Continuous innovation to solve a new problem will help you gain new customers and improve customer churn.
- Customer feedback is of the utmost importance. Addressing their pain points and incorporating their suggestions into your product or service can significantly reduce churn. This, in turn, will help you maintain consistent MRR growth.
Mrinal is a digital marketer by profession. Additionally, he has working experience in SaaS content promotion. He also likes to write and wants to explore the spiritual component of life.
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