Any SaaS business will track a number of Key Performance Indicators (KPI). And while there are many important KPIs, it's tough to think of one that's more crucial than Monthly Recurring Revenue. In fact, at the end of the day, paying customers really are the be-all and end-all of a software company.
The concept of Monthly Recurring Revenue is straightforward. It's just the total repeatable sales that a SaaS firm expects in a given month. Repeatable is a key word here: As the metric tries to offer a sense of a business's sales trend, it excludes one-time sales.
As Hubspot explains, Monthly Recurring Revenue can be calculated in two ways:
• One method is to take the company's total number of accounts and multiply this number by the average revenue per account
• Alternatively, you can multiply each account's revenue and add these figures to arrive at your MRR. Either approach should yield essentially the same result.
Why MRR is Important
Monthly Recurring Revenue offers a key snapshot of how your SaaS business is doing. For example, you may have a sales problem if your MRR is flat or falling. On the other hand, your product may not serve a significant market need. Alternatively, perhaps you've priced the product higher than most potential customers are willing to pay. Then again, you may have a great product at a reasonable price but need to invest more in sales and marketing.
Of course, if your MRR is on an upward trend, you are clearly doing something right. A rising (and especially a sharply rising) MRR indicates that your software is quickly gaining traction. Assuming you've priced it well, positive cash flow and earnings should soon follow.
MRR can also be important if you're a growing SaaS company looking for a term loan. As SaaS businesses don't tend to have much in the way of assets that can be pledged as collateral, lenders like ourselves look to MRR to gauge the likelihood that you'll be able to service a loan before extending credit. We love to see that your recurring monthly revenue is on an upward path.
MRR Broken Down
It can be useful to break MRR down further. This can be done in the following ways:
• New customer MRR: This tells you how much the customers you recently onboarded are paying. Ideally, they'll be spending more than existing ones.
• Expansion MRR: This metric "represents additional monthly recurring revenue from your existing customers." Expansion MRR is great because it tells you that existing customers are not just sticking with you; they're spending more on your product.
• Contraction MRR: conversely to expansion, sometimes customers decrease the amount they are paying due to business cyclality or their own business needing less “usage” or “seats” which your products pricing offers.
• Churn MRR: This figure tells you how much you lost "due to customers canceling or downgrading." Of course, every business will experience some loss in recurring revenue from existing customers, but the goal is to keep this to a minimum.
MRR vs. ARR
Why is MRR more important than ARR (Annual Recurring Revenue)? We would suggest that it's more useful, being higher-frequency data. If you only track ARR, you may not realize you have a revenue problem until it's too late. With MRR, you get 12 data points every year, and every 30 days or so can track how you're doing relative to the prior period. It lets you quickly see how new marketing campaigns or price changes impact your sales. This allows you to either stay the course (if your strategy is working) or change course (if they're not) in short order.
Are you an emerging SaaS business with growing MRR? Looking to accelerate your growth? Here at Element Finance, we offer easy-to-understand term loans for companies just like yours. Give us a shout anytime to see how we can help you take your sales to the next level.