In this definition page, we’ll take a look at:
- What is Monthly Recurring Revenue (MRR)
- How to Calculate MRR
- Calculating MRR for a Term Subscription
- Calculating MRR for a Monthly Subscription
- Types of MRR: Today’s, Contracted, and Committed
- How MRR Helps You Manage Your Subscription Business
- How to Use MRR
- MRR and GAAP (Generally Accepted Accounting Principles)
What is Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue, or MRR, is the measure of money (expressed as a dollar amount) that is paid monthly for a subscription for a product or service. MRR normalizes for different subscription terms which gives subscription businesses a clearer view of their businesses. MRR is an important subscription economy metric that represents predictable monthly revenue. As such, it provides valuable insight into sales and cash flow dynamics. It’s important to note, however, that while MRR represents revenue, it’s not an actual expression of exact revenue numbers.
How to Calculate Monthly Recurring Revenue
Your calculations will differ depending on whether you’re calculating for a term subscription business (subscriber has agreed to pay their subscription fees for a set period of time, e.g. annually) or for a monthly subscription business (subscriber pays month to month without a contracted term).
Calculating MRR for a term subscription. With a term subscription, you calculate MRR by normalizing the ARR to a monthly value. In general terms, MRR is typically calculated by taking the total of all annual, semi-annual, quarterly, or monthly recurring charges (MRC), subtracting one-time charges or fees to produce the annual recurring revenue (ARR), and then dividing by 12 (months in the year). For example, if a subscriber is contracted for an annual subscription term of $6000, you would divide $6000 by 12 to arrive at a MRR of $500. It’s important to note that this monthly revenue may not actually be captured monthly as many subscriptions aren’t paid monthly. In other words, if your subscriber is termed for an annual plan for $6000, they may have paid that fee up front rather than $500 each month. But the calculated MRR is still $500 -- in this case, it’s a representation of how much revenue you can expect monthly over the course of the subscription duration.
Calculating MRR for a monthly subscription. With a monthly subscription, your subscribers are actually billed on a monthly basis. So you can just pull actual monthly subscription fees to arrive at MRR.
Also important to note:
MRR can be calculated for a single customer by adding all of the MRC for that customer.
To calculate total MRR for your business, add up all MRC for all customers.
Changes to terms over a contract term or subscription lifetime will naturally change the MRR.
Types of MRR: Today’s, Contracted, and Committed
Generally, MRR falls into one of three categories:
Today’s MRR. Today’s MRR is monthly recurring revenue as of today’s date without accounting for future upgrades, downgrades, up-sells, or contract cancellations. It includes only today’s deliverables, using the baseline value of your product offering.
Contracted MRR. Contracted MRR is future MRR that includes revenues from future upgrades, downgrades, up-sells, and cancellations based on a contractual agreement between vendor and buyer. When the customer is on a month-to-month contract, only the minimum contracted component fees or charges are considered. Variable charges are excluded. For example, the MRR for a WiFi data plan would include the monthly subscription fee but not data overage charges.
Committed MRR. You can also calculate Committed MRR, if a month-to-month or other non-term customer shows routine, predictable buying habits. However, that figure is typically included with Contracted MRR since they are otherwise identical.
How MRR Helps You Manage Your Subscription Business
MRR provides a clear, focused view of the impact of new sales, renewals, upgrades, and losses by providing contract revenue normalization for accurate reporting and analysis across dissimilar subscriptions terms. As an analytical tool, the value of this metric is not in any particular sum, but in the ability to clearly identify the results of individual business activities included in your MRR. Thus, the strongest benefit of calculating MRR is in providing a tool for creating and managing growth.
How to Use MRR
MRR is an important plug-in for other calculations of the finance function as well as a good overall measurement of financial health. In particular, MRR can be used to:
Normalize for subscription terms of different lengths
Measure new contract growth and churn
Calculate CLV (Customer Lifetime Value)
Report on MRR Cohorts (i.e. subscription terms that were contracted in the same period of time) to assess how best to optimize revenue
MRR and GAAP (Generally Accepted Accounting Principles)
For finance departments, using MRR does come with caveats. First, the term MRR is not recognized by the Financial Accounting Standards Board (FASB) or the U.S Securities and Exchange Commission (SEC). It is not reportable GAAP revenue, and should not be confused with or incorporated into revenue recognition. In other words, MRR cannot be reported as GAAP revenue. Furthermore, MRR calculations cannot accommodate discount charges’ variability.
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