Monthly recurring revenue (MRR)

Definition

Monthly recurring revenue (MRR) is a key metric used by businesses, particularly in subscription-based models, to measure the predictable and recurring revenue generated from subscription services or products on a monthly basis. 

What is monthly recurring revenue?

MRR is based on the recurring billing cycle for subscription services, which is usually monthly, although it can vary depending on the subscription model. Each month, customers are billed for their subscription, resulting in a predictable stream of revenue for the business. It provides insight into the stability and growth path of a company’s revenue stream, making it a valuable indicator for financial planning, performance evaluation, and investor analysis.

MRR is affected by customer churn (cancellation of subscriptions) and expansion (upgrades or add-ons to existing subscriptions). Churn reduces MRR, while expansion increases MRR. Net MRR provides a more accurate measure of revenue growth.

To calculate MRR you sum up the monthly subscription fees from all active customers. This includes revenue generated from both new and existing customers, excluding one-time fees, discounts, and non-recurring revenue.

Monitoring MRR growth over time is crucial for assessing the health and performance of a subscription-based business. Positive MRR growth indicates increasing revenue, while negative MRR growth suggests declining revenue.

Example of monthly recurring revenue

ABC Software Company offers a subscription-based project management tool. They have three subscription plans: Basic, Pro, and Premium, priced at R10, R25, and R50 per month respectively.

At the beginning of the month, ABC Software has the following number of active subscribers for each plan:

• Basic plan: 100 subscribers
• Pro plan: 50 subscribers
• Premium plan: 25 subscribers

To calculate their MRR, ABC Software would sum up the monthly subscription fees from all active subscribers:

MRR = (100 x R10) + (50 x R25) + (25 x R50) = R3,500

So, the MRR for ABC Software Company is R3,500. This represents the total revenue they can expect to receive from subscription fees on a monthly basis.