If MRR and ARR are just letters that don't mean much to you right now, let me help break through the jargon and guide you through what they are, and why it's important that you know how to calculate yours correctly.
What is MRR - Monthly recurring revenue?
Monthly Recurring Revenue is the bread and butter of a SaaS business, quite simply it is your monthly income from your subscribers. You have customers signed up and paying you a fixed fee for your service each month, this equates to your MRR. Now that sounds easy, right? Surely it's just your number of subscriptions multiplied by your monthly charge (2,000 customers @ £200 pm = MRR £400,000).
Unfortunately, it's not quite that simple, it's likely that you have customers who signed up on a discounted monthly rate, have added on extra services, not to forget the customers you may have lost, so all of these anomalies will need to be taken into consideration to get an accurate MRR.
If you have a stable customer base with little churn, once you have your current MRR then you can forecast your future MRR enabling you to plan your finances effectively. Remember - this is just your INCOME so you don't need to look at any outgoings.
So... how can you easily get the right MRR figure?
You want to make sure you have everything covered, so let's explore what you need to take into account...
- All recurring monthly subscription charges, including any new customers
- Any lost customers - keeping a track of your customer churn is vital for the health (and survival) of your business
- Upgrades or indeed downgrades, anything causing a difference to the standard monthly charge
- Discounts - keeping track of your discounted fees is essential to getting your correct MRR figure
Let's work out an example of an additional repeat service offering and call it 'This May's MRR figure'.
Here's what to include:
- 1,800 customers paying a full subscription of £200 per month = £360,000
- 220 of those have extra services totalling = £5,500
- 150 customers on the discounted subscription of £150 per month = £22,500
Total May MRR = £388,000
And there it is - your MRR for May is £388,000, so let's look at your ARR next.
MRR & ARR - What's the difference?
We know that MRR is your Monthly Recurring Revenue, so it should not come as a surprise that ARR is your Annual Recurring Revenue and can be used to forecast your annual revenue, assuming your customer portfolio is fairly stable.Using our May MRR we could predict that the company will generate ARR of £4,656,000 over the next year.
Calculate (MRR £388,000 x 12 months = ARR £4,656,000)
If your company runs on monthly subscriptions then ARR may not really be of use to you and it may be better to stick to using MRR for your forecasting. However, if your company deals mainly in annual subscription plans, then ARR could work better for you.
What else should we consider?
We've covered MRR and ARR, but what if you provide a monthly service and a customer wants to pay upfront for a year (or more)?
This does muddy the waters and can't be counted as part of your MRR as it is, although the customer is receiving your monthly service, you are not receiving a monthly payment for it. Therefore, this income needs to be counted in your "Bookings" figure.
What is a bookings figure I hear you say!
This is when a new customer has committed to spending money with your company, basically "booking" your service and this figure will cover all of your customers, regardless of when they pay. This is great for calculating cash flow, but MRR measures your recurring revenue and this is what we are interested in here.
How do we include pre-paid bookings in our MRR?
To include a booking that has been pre-paid for the entire year in your MRR, firstly you will need to divide the payment into 12 equal amounts over the year.
For example, if you don't spread the payment received when a new customer signs up for a year and pays you upfront, you may add that entire payment to the current month's revenue leading you to report your MMR the MMR amount in error. This makes that month look great, but the following month it will drop even though you now have an extra customer to service. This is not truly representing the MRR for the month, as you have been/are being paid by the new customer, but it was incorrectly represented in the previous month's figure.
In summary - you don't want to confuse your numbers...
MRR - a figure to identify your Monthly Recurring Revenue,
ARR - your Annual Recurring Revenue - mostly useful for companies who deal in annual contracts rather than monthly subscriptions.
Bookings figure - the total value of new deals in any given period.
Now you know what these all mean and the basics of how to calculate them, you should be able to easily identify what revenue your business is generating, using MRR or ARR to suit your business model.
If you want to learn more about forecasting, HubSpot has provided a great FREE guide that you can download.
If you're looking for ways to increase your customer base and grow your sales further we can help, fill in the contact form below and we will be in touch!