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Monthly recurring revenue

What Is Monthly Recurring Revenue?

Monthly recurring revenue (MRR) is a key financial metric representing the predictable, recurring income a company expects to receive each month from its customers for providing products or services. It is particularly prevalent in companies operating under a subscription-based model within the broader category of financial metrics. MRR provides a normalized view of revenue, making it a crucial indicator for financial forecasting and assessing the stability of a business model. Companies utilize monthly recurring revenue to understand their ongoing revenue streams, which differs from one-time sales or variable fees.

History and Origin

The concept of recurring revenue, foundational to monthly recurring revenue, has roots dating back centuries. The subscription business model itself was pioneered by publishers of books and periodicals in the 17th century, providing recurring access to content for a regular fee. Later, services like milk delivery also adopted recurring payment structures.

In the modern era, the widespread adoption of monthly recurring revenue accelerated significantly with the rise of digital services and the internet. A pivotal moment came in 1999 when Salesforce launched its Customer Relationship Management (CRM) platform, becoming one of the first major companies to offer a cloud-based Software as a Service (SaaS) solution with a monthly subscription fee instead of a perpetual license.23 This marked a shift from traditional software sales and laid substantial groundwork for businesses to embrace recurring revenue models for digital products and services.

Key Takeaways

  • Monthly recurring revenue (MRR) is a normalized financial metric that indicates a company's predictable monthly income from recurring subscriptions or contracts.
  • It is vital for companies, especially those in the SaaS industry, to track MRR for evaluating growth, predicting future income, and assessing financial health.
  • MRR helps investors gauge a business's stability and scalability, making companies with strong MRR often more attractive investment opportunities.
  • The calculation of MRR should exclude one-time fees, non-recurring charges, and potential future revenue from trials, focusing solely on contractually obligated recurring income.
  • While a critical operational metric, MRR is not a Generally Accepted Accounting Principles (GAAP) recognized revenue figure and should be differentiated from GAAP revenue for financial reporting.

Formula and Calculation

Monthly recurring revenue is typically calculated by multiplying the number of paying customers by their average monthly subscription fee. For businesses with varied pricing tiers or annual contracts, it involves normalizing all recurring revenue to a monthly figure.

The basic formula for monthly recurring revenue is:

MRR=∑i=1NMonthly Recurring Revenue per Customeri\text{MRR} = \sum_{i=1}^{N} \text{Monthly Recurring Revenue per Customer}_i

Alternatively, if an Average Revenue Per User (ARPU) is consistent, it can be calculated as:

MRR=Number of Active Customers×Average Monthly Recurring Revenue per Customer\text{MRR} = \text{Number of Active Customers} \times \text{Average Monthly Recurring Revenue per Customer}

Where:

  • $\text{MRR}$ = Monthly Recurring Revenue
  • $N$ = Total number of active customers with a recurring subscription
  • $\text{Monthly Recurring Revenue per Customer}_i$ = The normalized monthly revenue generated from an individual customer $i$

It is crucial to exclude one-time payments, setup fees, or any non-recurring charges from this calculation to accurately reflect the predictable nature of monthly recurring revenue.

Interpreting the Monthly Recurring Revenue

Interpreting monthly recurring revenue involves looking beyond the absolute number to understand its components and trends. A growing MRR generally signals a healthy business with increasing customer adoption or expansion of existing customer contracts. Conversely, a declining MRR can indicate issues with customer retention, customer churn, or a slowdown in new customer acquisition.

Analysts also segment MRR into various types to gain deeper insights:

  • New MRR: Revenue from new customers acquired in the period.
  • Expansion MRR: Additional revenue from existing customers through upgrades, add-ons, or increased usage.
  • Churned MRR: Revenue lost from cancellations or downgrades.
  • Reactivation MRR: Revenue from returning customers.

Monitoring these components helps a business understand the drivers of its overall monthly recurring revenue and pinpoint areas for improvement, such as reducing the churn rate or enhancing opportunities for expansion.

Hypothetical Example

Consider "CloudVault," a hypothetical cloud storage provider offering monthly subscription plans.

  • Basic Plan: $10 per month
  • Premium Plan: $25 per month

In January, CloudVault has:

  • 1,000 customers on the Basic Plan
  • 500 customers on the Premium Plan

To calculate CloudVault's monthly recurring revenue for January:

MRRBasic=1,000 customers×$10/month=$10,000\text{MRR}_{\text{Basic}} = 1,000 \text{ customers} \times \$10/\text{month} = \$10,000 MRRPremium=500 customers×$25/month=$12,500\text{MRR}_{\text{Premium}} = 500 \text{ customers} \times \$25/\text{month} = \$12,500 Total MRRJanuary=$10,000+$12,500=$22,500\text{Total MRR}_{\text{January}} = \$10,000 + \$12,500 = \$22,500

Now, assume in February:

  • 50 new customers subscribe to the Basic Plan (New MRR).
  • 20 existing Basic Plan customers upgrade to the Premium Plan (Expansion MRR for Premium, negative churn for Basic).
  • 10 Premium Plan customers cancel their subscriptions (Churned MRR).

Changes in February:

  • New Basic Plan Customers: 50 customers * $10 = $500 (New MRR)
  • Basic to Premium Upgrades: These 20 customers now pay $25 instead of $10, an increase of $15 per customer. So, 20 customers * $15 = $300 (Expansion MRR). The $10 from these customers is no longer part of Basic MRR (effectively churn from Basic, but net positive for overall MRR).
  • Premium Plan Cancellations: 10 customers * $25 = $250 (Churned MRR)

Updated Customer Counts for February:

  • Basic Plan: 1,000 (initial) + 50 (new) - 20 (upgraded) = 1,030 customers
  • Premium Plan: 500 (initial) + 20 (upgraded) - 10 (canceled) = 510 customers

CloudVault's MRR for February:

  • Basic Plan MRR: 1,030 customers * $10 = $10,300
  • Premium Plan MRR: 510 customers * $25 = $12,750
  • Total MRR for February: $10,300 + $12,750 = $23,050

This example illustrates how monthly recurring revenue fluctuates based on new subscriptions, upgrades, and cancellations, providing a clear picture of the company's ongoing predictable revenue. Analyzing these shifts, including net churn, is crucial for understanding the business's growth trajectory.

Practical Applications

Monthly recurring revenue is a cornerstone metric for businesses, particularly those with a subscription or recurring revenue model, due to its ability to provide predictability and stability.

  • Financial Health Assessment: MRR offers a consistent measure of a company's financial performance. It helps in understanding the underlying health of the business by focusing on stable, repeatable revenue streams, rather than fluctuating one-time sales.22
  • Investor Relations and Valuation: For investors, monthly recurring revenue is a primary indicator of a company's potential for sustainable growth and long-term viability. Businesses with robust and growing MRR often command higher valuation multiples because the predictability of future earnings reduces perceived risk.21,20,19 This predictability allows for more accurate financial modeling and makes a company more attractive for funding rounds.18,17,16
  • Strategic Planning and Budgeting: The stability provided by monthly recurring revenue allows companies to confidently plan for future investments, hiring, and operational expenses. It enables more accurate cash flow management and long-term strategic initiatives.15
  • Operational Performance Tracking: MRR helps departments like sales and customer success track their performance against targets. Changes in monthly recurring revenue, such as those driven by new customer acquisition, expansions, or churn, provide actionable insights into the effectiveness of sales strategies, product offerings, and customer retention efforts.

For example, public companies utilizing a SaaS business model frequently report monthly recurring revenue in their quarterly and annual reports to demonstrate growth trends to the market.14

Limitations and Criticisms

While monthly recurring revenue is an invaluable metric, it has certain limitations and criticisms that businesses and investors should consider.

One primary criticism is that MRR is not a Generally Accepted Accounting Principles (GAAP) recognized term or a standard defined by accounting frameworks like IFRS.13,12,11 This means there is no universally prescribed "right" way to calculate it, and its reporting can vary significantly between companies.10 This lack of standardization can lead to inconsistencies and potential misinterpretations, as it does not always align with the revenue recognition principles required for official financial statements, such as the income statement.9,8 GAAP revenue is typically recognized over time as the service is delivered, regardless of when cash is collected, whereas MRR focuses on the normalized, predictable monthly expectation.7,6

Another limitation is its focus solely on the recurring aspect, which can sometimes overshadow other important financial health indicators. MRR does not directly account for:

  • One-time fees or setup costs: These are excluded from MRR, but they can contribute significantly to a company's total revenue and cash flow.5,4
  • Future revenue from trials or unclosed deals: Including these can inflate MRR and present an overly optimistic picture before a customer converts to a paying subscriber.3,2
  • Customer Lifetime Value (CLV) beyond the immediate month: While MRR contributes to CLV, it doesn't offer the full long-term value perspective on its own.
  • Profitability or expenses: MRR is a top-line revenue metric and does not reflect a company's costs or net profit.

Some critics argue that an overemphasis on MRR can lead to an operational focus on simply "filling time" or "over-servicing" clients to maintain the recurring payment, potentially decreasing the pressure for innovation if not managed carefully.1 It's essential to use MRR in conjunction with other financial and operational metrics for a comprehensive view of a company's performance.

Monthly Recurring Revenue vs. Annual Recurring Revenue

Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are both critical metrics for businesses operating on a subscription or recurring revenue model, but they differ in their timeframes and typical applications.

Monthly Recurring Revenue (MRR) represents the predictable and recurring income a company expects to generate each month from its active subscriptions. It is a granular metric that provides a real-time snapshot of a business's health and momentum, smoothing out fluctuations from varying billing cycles. MRR is particularly useful for tracking short-term growth trends, assessing immediate financial performance, and making tactical operational decisions. It's often favored by early-stage startups and businesses with predominantly monthly billing cycles.

Annual Recurring Revenue (ARR), on the other hand, annualizes the monthly recurring revenue to represent the predictable recurring income a company expects to generate over a full year. It is typically calculated by multiplying MRR by 12. ARR provides a longer-term view of a company's revenue trajectory and is commonly used by larger, more mature businesses with significant annual contracts or multi-year agreements. Investors often look at ARR for long-term strategic planning, company valuation, and forecasting future revenue over a broader horizon. While MRR offers agility in tracking monthly changes, ARR is essential for understanding the sustained growth potential and overall scale of a business, especially for long-term investors.

FAQs

What types of businesses typically use Monthly Recurring Revenue (MRR)?

Monthly recurring revenue is primarily used by businesses with a subscription-based model, where customers pay a recurring fee for access to a product or service. This includes Software as a Service (SaaS) companies, media streaming services, online learning platforms, and many other digital and physical subscription box services.

How does MRR relate to a company's cash flow?

MRR is a strong indicator of a company's predictable cash flow. Consistent MRR suggests a steady inflow of funds, which helps a business manage expenses, invest in growth, and maintain financial stability. However, MRR itself isn't cash in hand; it's a measure of expected recurring revenue, and the actual timing of cash receipts can vary (e.g., annual prepayments for a monthly service).

Is MRR a GAAP-compliant metric?

No, Monthly Recurring Revenue (MRR) is not a Generally Accepted Accounting Principles (GAAP) compliant metric. While it is a crucial operational metric for internal analysis and investor communication, it does not adhere to the formal accounting standards for revenue recognition. GAAP revenue reflects when services are actually delivered, often on an accrual basis, whereas MRR focuses on the normalized, expected recurring revenue.

Why do investors care about Monthly Recurring Revenue?

Investors highly value monthly recurring revenue because it signifies predictability and stability in a company's income stream. A strong and growing MRR indicates a robust customer base, effective customer retention, and significant scalability, all of which contribute to a higher business valuation and reduced investment risk.

Can MRR decline even if the number of customers increases?

Yes, MRR can decline even if the total number of customers increases, particularly if the increase in customers is primarily from lower-priced plans, or if there's a significant amount of "down-churn" (existing customers downgrading to cheaper plans) that offsets the new customer acquisition. It's why tracking components like expansion MRR and churn rate is important.