How to calculate mrr
Monthly Recurring Revenue (MRR) is a vital metric that measures the predictable, steady income generated by a subscription-based business. It provides an overview of the financial health and growth potential of a company. Calculating MRR can be quite simple or more complex, depending on your business model. In this article, we will explore different methods for calculating MRR so you can determine which one best suits your organization.
1. Basic MRR Calculation
The simplest way to calculate MRR is to multiply the total number of active paying customers by their average monthly subscription fee. This method works well for businesses offering single pricing plans.
MRR = Total Active Paying Customers x Average Monthly Subscription Fee
For example, if you have 50 customers paying $100 per month, your MRR would be:
MRR = 50 x $100 = $5,000
2. Multiple Pricing Plans
For businesses offering multiple pricing plans or tiers, you’ll want to consider each plan separately when calculating MRR.
MRR = Σ (Number of Customers per Plan x Average Monthly Subscription Fee per Plan)
Simply calculate the MRR for each plan individually and then sum the result.
3. Discounts and Custom Pricing
If your subscription-based business offers discounts or custom pricing, this should also be taken into account when calculating MRR.
To do this, first determine the total monthly revenue for each customer by factoring in their individual discounts or custom prices. Next, add up the adjusted monthly revenues for all active customers to determine your final MRR figure.
4. Expansion and Contraction MRR
It’s important to also factor in expansion and contraction MRR when determining overall revenue growth.
– Expansion MRR: The additional revenue gained from existing customers who upgrade their subscription plan, purchase add-ons or additional services.
– Contraction MRR: The loss of revenue from existing customers who downgrade their subscription plan, cancel add-ons or receive additional discounts.
To calculate your net MRR, add expansion MRR to your base MRR and subtract contraction MRR:
Net MRR = Base MRR + Expansion MRR – Contraction MRR
By tracking these metrics over time, you can identify key trends and insights into the growth and sustainability of your business.
5. Churn Rate and MRR
When calculating MRR, it is important to factor in customer churn (the percentage of customers who cancel their subscriptions within a given time period). Churn negatively impacts MRR, making it crucial to minimize churn rates.
By monitoring your churn rate alongside your MRR, you can identify issues in customer retention and satisfaction which may require attention.
In conclusion, calculating MRR is an essential part of managing a subscription-based business. By employing the various methods detailed in this article, you can gain a clearer understanding of your company’s financial health and find opportunities for strategic growth.