Monthly Recurring Revenue

Rafat Abushaban

- Finance #  O 2.8K views   اقرأ بالعربية

Summary:Monthly Recurring Revenue measures the income that a business receives every month- a predictable revenue

Monthly Recurring Revenue (MRR) is a measure for the "predictable" income that a business makes every month, mostly related to a "Subscription Business Model". In such a model, a business sells customers subscription for their services or products where customers pay standard fee on a monthly basis.

MRRAverage income per paying customer x Number of paying customers

Balance The Recurring Revenue concept forms the cornerstone for many software and IT startups. In theory- if you have a model where customers pay periodically for the service provided, you have sustainable revenue. Thus, it is considered as a main indicator to information-based startups as it most easily utilized online by asking the customer to join, and then automatically charging them for usage every month or every year.
 
MRR can be estimated as early as the Business Model stage even before starting the startup. Following the Value Proposition Canvas's process on product and customer fit, a product can be identified through addressing customer gains, pains and jobs.
 
MRR in particular is most common among internet startups, as is often used by evaluators and investors to decide on which startup to invest in as it gives an indicator on the overall health of the recurring model. A complementary key indicator is the Average Revenue Per Unit, which shows how each customer is generating in revenue. It can be calculated according to the following equation:

Average Revenue Per Unit (Monthly)Monthly Recurring Revenue
Total number of customers

Calculating MRR can also help set future growth goals, and act as a Key Performance Indicator for the business, alongside other similar indicators (Like the Annual Recurring Revenue ARR).

MRR Example 1:



A-Host is an online business that offers online hosting service for websites. It has only 10 customers paying $470 for a subscription service, then the MRR for A-Host would be ($470x10)=$4,700.

MRR Example 2:



Let's see B-Host, also a web-hosting service offering three subscription packages: Basic ($40/month), Advanced ($50/month), Premium ($60/month). The company has 100 customers. 50 of which are subscribed to the Basic package, 30 are on the Advanced package, and the remaining 20 are Premium.

B-Host MRR(50x$40)+(30x$50)+(20x$60) = $4,700

What differentiates between the above examples?



The MRR in each of the above examples was the same ($4,700), but A-Host and B-Host have different packages and number of customers. So how can we differentiate?

Considering A-Host, their Average Revenue per unit would be $470 calculated as follows:

Average Revenue Per Unit$4,700 (MRR)
10 (# of customers)

Considering B-Host, their Average Revenue per unit would be only $47 calculated as follows:

Average Revenue Per Unit$4,700 (MRR)
100 (# of customers)

This way, you can clearly distinguish between the two cases. A-Host seems to focus on the quality of each customer, while B-host is more interested in the quantity of its customers.

MRR Churn


MRR Churn represents the decline in the MRR revenue. MRR Churn is another component that is essential to measure to understand how the business is performing monthly.
 
To understand MRR Churn, it is important to address the product and finances behind it.

  • Product should be focused on keeping as low churn and as high MRR as possible. In an ideal world, a great product should lead to no cancellations in the subscription (i.e. Zero MRR churn)
  • Financially, churn should be accounted for to identify how much MRR is being lost. Tracking the trend of MRR Churn over multiple months can help identify business gaps and help address them quickly, keeping loss at a minimum.

Using MRR among other revenue streams


As mentioned in the Business Modeling Free Course, revenue streams are many and could be used in conjunction with one another. MRR is one such revenue stream that could be used for fast-paced startups alongside one-time premium product or service selling. This way, financial sustainability increases as the startup can have a diversified sources of revenue streams. For example, see how telecom companies charge for usage per month, and offer as-you-go top up service.