Well, we all today knows the concept of software as a service business structure. But, what we forget is that SaaS businesses success and failure completely depend on its Monthly Recurring Revenue . MRR is a big part of companies who are relying upon the growing popularity of this business model.
It predicted by the industry experts that the SaaS market will grow at an annual rate of 17% by 2023. Moreover, the whole estimated growth of the industry will be over $60 million by the next fall. Because of such a terrific success rate number of tech companies are moving towards this business model.
However, the problem here is that even though MRR is based on a clear metric, but it does bring some challenges. Every company who is planning to adopt a model should be aware of.
What is MRR?
MRR or Monthly Recurring Revenue showcase all of your company’s recurring revenue of a particular month. This process measures the expected and recurrent income produced by the SaaS business model. The basic feature of MRR is to track down your billing periods and pricing plans over time. It gives you a clear picture of your company’s performance status and helps you in predicting the future state of your business.
How to Calculate MRR?
There two main methods to calculate your business’s Monthly Recurring Revenue; Customer by Customer method and Average Revenue Per Account.
Customer to Customer – Under this method, you have to simply add up the monthly fee paid by every customer. Suppose, your Customer A is paying ₹500 per month and Customer B is paying ₹300 per month. So, your total recurring income will be ₹800. In excel format, this is how it looks: MRR = SUM (Monthly fees of Paying Customers).
Average Revenue per Account – APRA is a straightforward method to calculate MRR. This method is used alternatively to the customer by customer method. In this method, you take the total number of paying customers and multiply by the average amount your customers pay each month (ARPA). Suppose, you have a total of 10 paying customers and the average amount paid by the individual is ₹200. So, according to ARPA, your monthly recurring revenue will be ₹2000. Its excel format is; MRR = (ARPA) * (Total No of Paying Customers).
Types of MRR
Monthly Recurring Revenue isn’t truly static and there are four types of MRR can be received by your business on a monthly basis;
This is the type of revenue which you obtain from your new customers. For instance, if in April Month, you acquire 40 new customers paying ₹100, and 10 new customers paying ₹200, then your new MRR for April month would be ₹6000.
This recurring revenue showcases the lost revenue because of package downgrade or cancellation of the account. Like, if you have five canceled account in April of paying ₹100 and five plan downgrades of ₹200. So, your churned MRR is going to decrease by ₹1500 by next month.
This situation occurs when customers upgrade their account or add new features to their current plan. Imagine, you have four customers who have upgraded their plan from ₹100 monthly to ₹200. So, your expansion per month is going to be ₹400.
This is what you get when previous customers reactivate their subscriptions. Let’s assume you have three lapsed customers who are reactive for ₹200 per month. Then, your reactivation MRR will be ₹600.
We have to cut short this post here, but this post is going to continue. So, do read the next part of the post to under SaaS business model and impact of MRR.