You're probably familiar with the concept, 'It's a Numbers Game,' but how can you put that wisdom to work? Interpreting statistics from a startup can be challenging, especially when you don't know the cause or significance of your data.
If you want to understand jargon-laden analyses like "a resilient growth trend of a 15% MRR increase, underpinned by a successful Reactivated MRR, offsetting the Churn MRR's impact and illustrating robust customer retention strategies," we're here to help! Today, we'll be explaining a key metric for subscription-based businesses: Monthly Recurring Revenue (MRR).
Monthly Recurring Revenue - Definition
noun. The predictable monthly income generated from a subscription-based product or service.
To fully understand an MRR report, you'll need to know the following types:
1. New MRR - New Customers
Any new Monthly Recurring Revenue from new customers.
Example: This month, your company took on one new client who is paying $40/month for your service. Your New MRR for the month is $40.
2. Expansion/Upsell MRR - Upgrades!
Additional revenue from current customers when they upgrade to a more expensive subscription.
Example: The next month, your client upgrades to a more expensive plan, increasing their subscription from $40 to $60/month. Your Expansion/Upsell MRR is the additional $20 in revenue.
3. Contracted MRR - Downgrades
This is any revenue lost from current customers who downgrade their subscription. This will be represented with a negative number.
Example: The following month, your client no longer needs the same plan and downgrades to one of your cheaper subscription options. They choose to downgrade from their $60/month plan to $20/month. Your Contracted MRR is -$40.
4. Churned MRR - Cancellations
Revenue lost from customers who cancel.*
Example: The next month, your client no longer needs your service. They cancel the $20/month subscription, meaning your Churned MRR is -$20.
* Depending on your source, churned MRR may count downgrades and cancellations. If you choose to add them together, make sure to adjust your Net New MRR equation by removing Contraction MRR (see below).
5. Reactivated MRR - Returners
When customers who previously churned start paying for the service again.
Example: The client who previously canceled their subscription comes back at $40/month, giving you a Reactivated MRR of $40.
6. Net New MRR - The Sum
The new MRR that takes into account all of the metrics above: The month's expansion/upsell MRRs, contracted MRRs, churned MRRs, and reactivated MRRs.
Here's the equation:
Net New MRR = New MRR + Expansion MRR - Contraction MRR* - Churn MRR*
* If you're calculating Churn MRR as the downgrades plus the cancellations, you don't need to include Contraction MRR in the equation above (as it would be redundant).
How to Use Your MRR Data
Financial Health Assessment
MRR is a key indicator of your startup's financial health: Are you growing, stagnating, or declining? This will help you make better-informed decisions about your startup's future. You can identify growth trends, measure the effectiveness of your marketing and sales efforts, and adjust your strategy accordingly.
Which subscription plan is most popular? Which one do people swap to? Swap from? The detailed MRR metrics can help you evaluate the performance of your pricing strategies. Track which channels / plans drive the most revenue, and allocate resources accordingly to optimize for maximum revenue.
Use your MRR data to make revenue forecasts. What time of year do you typically gain the most New MRR? When do people increase their subscription? When do they back off on spending and swap to a cheaper plan? Planning for the future is crucial for budgeting, resource allocation, and determining when to scale.
How many customers are churning? And when? How can you disrupt this pattern and retain customers longer? This is often more cost-effective than acquiring new customers, and can bring all the benefits of a loyal consumer base and their glowing reviews.
If you're seeking external funding (such as from venture capitalists or angel investors), MRR is a key metric they'll want to look at. A strong and consistent MRR growth trend can potentially lead to better funding opportunities.
MRR can serve as a clear and measurable goal for your team. Review the data with your team to align everyone around a common objective: increasing recurring revenue.
Measure What Matters
MRR metrics are essential for startup founders to assess financial health, track growth, make data-driven decisions, attract investors, and more. By regularly monitoring MRR and other relevant metrics, you can navigate the challenges of building a successful subscription-based business more effectively.
Need a second pair of eyes to analyze your MRR data? Connect with BearPeak! Our experienced leaders provide guidance and leadership experience, including how to interpret and improve your MRR results.
For further reading, we recommend Visible's Monthly Recurring Revenue (MRR) Explained: Definitions + Formulas.
It's important for us to disclose the multiple authors of this blog post: The original outline was written by chat.openai, an exciting new AI language model. The content was then edited and revised by Lindey Hoak.
"OpenAI (2023). ChatGPT. Retrieved from https://openai.com/api-beta/gpt-3/"