Monthly Recurring Revenue in SaaS: What it is, how to Calculate it, and the Different types of MRR

Why is MRR an important metric for SaaS companies?

MRR is a key metric for SaaS companies because it provides the basis for deeper KPI-based SaaS financial planning. Here are a few reasons why you must track MRR.

1. MRR can be used to calculate your annual recurring revenue (ARR)

SaaS company valuations depend on their annual recurring revenue (ARR), which is a leading indicator for momentum. Multiplying MRR by 12 gives you the ARR for your company, which is a key metric for evaluating SaaS company performance. For instance, SaaS company valuations depend on ARR, and boards use the previous year’s ARR to set new ARR targets.

Tracking MRR also helps you figure out where you’ll land by the end of the year and feeds into several SaaS financial planning and analytics (FP&A) models.

2. MRR gives you a snapshot of your current revenue

MRR gives you a snapshot of where your revenue currently stands. Tracking MRR trends and changes in the different types of MRR (mentioned in the next section) will help you figure out what you need to address in your business. For instance, a dip in new business MRR tells you your sales team or product needs work to bring new customers in.

3. Crucial for financial planning

MRR, along with ARR, serves as the basis for many SaaS decision making processes. MRR also feeds into your monthly close workflows, giving you insights into cash flow and other important financial metrics. 

4. Offers insights into different areas of SaaS your business

The different types of MRR help you figure out what’s lacking in your business and where you need to devote resources. For instance, rising contraction MRR indicates potential problems with your product’s features or decreasing product to market fit.

The 8 types of MRR

There are different elements of MRR that can be calculated. Each of these types provides insights into what is working and not working in your business. 

• New MRR – This is MRR generated from new business. This helps you track your appeal to new customers. It’s also called “new logo MRR” or “new business MRR.”
• Retention MRR – This is MRR generated from renewed subscriptions. This number helps you understand the value you’re delivering to your existing customers. Retention MRR (also known as Renewal MRR) is a predictor of customer satisfaction. It’s also an indicator of future growth because it represents your ability to deliver long-term value to your customers, which helps to generate more revenue without adding to your CAC.
• Expansion MRR – Expansion MRR includes the purchase of add-ons or additional seats and upgrades to higher tiers or increased consumption if you have a usage-based pricing model. Companies capture this revenue through upsells and cross-sells. Prioritizing expansion MRR is a great way to boost revenue without increasing CAC.
• Churned MRR – This is MRR lost due to subscription cancellations. Churn is a good indicator of customer satisfaction. Investigate the issues behind churn and you’ll receive a good picture of what your product lacks and what your customers want.
• Contraction MRR – This is MRR lost from subscription downgrades. Contraction MRR includes subscriptions that are paused or downgraded to lower-priced plans, and the cancellation of any recurring add-ons. If you offer a customer a discount or credits, those are included as part of Contraction MRR as well.
• Resurrected MRR – This is the MRR generated from subscriptions who canceled but then signed up with you again. Resurrected MRR is also sometimes referred to as “Reactivation MRR”.
• Committed MRR – Committed MRR (CMRR, pronounced “see-mer”) is a forward looking metric that indicates the MRR a company expects to earn based on contract commitments. Committed MRR is also sometimes referred to as “Contracted MRR”.
• Net New MRR – Net New MRR is the increase or decrease in the current month’s MRR compared to the previous month. Net New MRR is a volatile number, given its monthly focus. However, you can correlate it with new marketing and sales campaigns as a way of measuring how effective they are.

How do you calculate your MRR?

You can calculate MRR by summing the following:

• Revenue earned from new subscriptions (New MRR)
• Revenue earned from subscription upgrades (Expansion MRR)
• Revenue earned from existing subscription renewals (Retention MRR)
• Subtract revenue lost from canceled subscriptions (Churned MRR)
• Subtract revenue lost from downgraded subscriptions (Contraction MRR)

Here is the formula for calculating MRR:

Example MRR calculation

Let’s illustrate how you can calculate your company’s MRR:

A few tips to remember when calculating and tracking your MRR

When you’re calculating your MRR, make sure you’re not including the wrong data:  

• Exclude trials – MRR includes predictable or confirmed revenue. Trials are neither. For example, monthly revenues from a customer that has signed a contract will almost certainly arrive in your bank account. However, someone who has signed up for a trial (even if it is paid) may not upgrade their subscription, thus making this revenue stream less reliable. 
• Exclude discounts and coupons – Always deduct the value of discounts and coupons when calculating MRR since these represent a reduction in subscription amounts. They are considered part of your Contraction MRR.
• Exclude non-recurring revenue – MRR does not include revenues from implementation fees, hardware fees, and non-subscription activities like consulting. 

If your subscription model isn’t monthly, you’ll also need to normalize your calculation for recurring revenue to a 30-day period to get your MRR. This is pretty straightforward with annual and quarterly subscription models. 

For an annual subscription model, you would simply divide your ARR by 12. Likewise with a quarterly subscription period, you would divide your quarterly recurring revenue by four. 

Normalizing your recurring revenue calculation to MRR becomes a bit more complicated when your subscription period is measured in weeks or days. While Drivetrain handles this type of calculation easily, you can use the same variables in the MRR calculation above to calculate an MRR for any time period over which you have data. 

Once you’ve calculated your MRR, you’ll want to pay close attention to each individual component of the metric, analyzing how it may be impacting the total MRR. This will help you understand the full picture of your company’s health.

Also, don’t treat MRR as an accounting number. MRR is not a generally accepted accounting principles (GAAP) number. Therefore, you should not report it for accounting or tax purposes.

What is a good SaaS MRR growth rate?

There is no single “good” MRR growth rate since it varies depending on your company’s maturity and revenue model. MRR is a useful metric, however focusing solely on MRR to track your growth is not a good idea because it is sensitive to the effects that seasonality or temporary market disruptions have on your business.

While most growth rate studies focus on ARR (since it’s more stable compared to MRR,) a few MRR-based studies exist. Back in 2014, Veteran VC Tomasz Tunguz of Redpoint indicated that post-seed, pre-Series A startups must target a 15-20% MRR growth rate.

Tunguz arrived at this conclusion by laying out the following assumptions:

• Estimated capital raised at seed - $1M
• Estimated capital raised in Series A - $5M
• Percentage equity sold at seed - 15%
• Percentage of equity sold in Series A - 20%
• Implied valuation at seed - $6.7M
• Implied valuation at Series A - $25M
• Time from seed to Series A - 9-10 months

Extrapolating this data, we can conclude that a company must increase MRR by 15-20% to achieve its goals. However, Tunguz’s assumptions are a bit dated, even if they largely hold true in the current VC landscape.

Jason Lemkin, Founder of SaaStr and veteran VC, offered a more recent answer. Lemkin notes that double-digit MRR growth is a benchmark for every company that has gained traction. 15% is great while 20% is an outlier.

Ultimately, a “good” MRR growth rate boils down to your growth goals, traction in the market, and current maturity.

How to analyze MRR – an example

MRR trends can reveal actionable insights into your SaaS business. Here’s a simple example illustrating how the different types of MRR can reveal gaps in your business.

Let’s assume our SaaS company has the following numbers:

Our SaaS company has a healthy New MRR number of $400,000. However, our total MRR is $390,000. At $70,000, our churn is also higher than our Retention MRR of $60,000. And at $60,000, our Contraction MRR is three times higher than our Expansion MRR of $20,000.

One possible interpretation of this data is that we need to focus more on product quality or product market fit. Despite getting plenty of new customers each month, we’re clearly having trouble keeping some of our customers (commonly referred to as the Leaky Bucket scenario).  

Based on our high Resurrected MRR, which reflects revenue from customers who canceled their subscriptions but came back, we can assume that our competition in the market is relatively low. So, if we can improve our churn and contraction by addressing product issues, our SaaS can capitalize on that lack of competition and grow faster. 

Admittedly, this is a simplistic analysis. However, it shows how the different types of MRR can lead you deeper into your business, revealing different insights that when combined, can lead to additional insights that you can leverage to improve your business.

How Drivetrain simplifies MRR analysis

Using MRR as a basis for further projections is challenging due to the processes many FP&A teams rely on. Spreadsheets and business intelligence tools have their uses but are not customized to fit FP&A or the specific needs of Revenue Operations (RevOps) teams.

Spreadsheets are inflexible and not built for modern SaaS FP&A needs. Using them for complex financial analyses requires building highly elaborate formulas, which are prone to human error. Business Intelligence (BI) tools offer historical snapshots but you can’t use them to answer the “what-if” types of questions needed to support planning and analysis (e.g. “If I increase my advertising budget by 20%, what would the impact be on my revenue?”). 

Drivetrain is a purpose-built solution for simplifying the FP&A process with a familiar interface where you can:

• Automate data sourcing, build reports and dashboards in an Excel-based interface.
• Drill-down from summary to transaction data to quickly identify drivers that impact revenue goals and answer follow-up questions.
• Automate calculation and consolidation of financial and SaaS metrics, cash flow and sales projections.

Calculating MRR with all its nuances is a challenging task. Presenting it in a way so that people can make the right decisions is even harder. With the right tool, you can extract actionable insights from MRR to drive your business forward.