Monthly Recurring Revenue (MRR)
Why it matters
The total hides the story. MRR becomes useful when each month's change is split into movements:
- New: revenue from customers who started.
- Expansion: extra revenue from existing customers who upgraded or added seats.
- Contraction: revenue lost to downgrades.
- Churn: revenue lost to cancellations.
A worked month: MRR starts at 10,000. New customers add 1,500, expansion adds 500, downgrades remove 200 and cancellations remove 700. MRR ends at 11,100, up 1,100 from 2,000 gained and 900 lost. Reporting only the 1,500 of new sales would have hidden that 900 leaked out. Dividing gains by losses, 2,000 over 900, gives a quick ratio of about 2.2.
How to apply it
- Calculate it from invoices or subscriptions in the billing system, not from the bank balance.
- Split every month's change into the four movements and look at each.
- Track growth as a percentage month on month as well as the total.
- Watch the churn rate and net revenue retention. Rising MRR with falling retention means growth is being bought, not kept.
- Use one definition and keep to it, so month-to-month comparisons stay valid.
What it is
MRR adds up what every active subscription is worth per month. Customers who pay yearly are counted as one twelfth of the annual amount each month. Setup fees, one-off projects, hardware and anything that will not repeat are left out. Multiply MRR by twelve and you get ARR, the annual figure.
Count revenue after discounts, from customers who are actually paying. Trials that have not yet converted are not included. Usage-based charges that vary month to month are normally tracked apart from the fixed part, or averaged, so that MRR stays a steady number.
Common mistakes
Including one-off fees. Counting contracts that have been signed but not started as live MRR (the separate committed MRR figure exists for that). Quoting MRR for a business where most revenue is not recurring.
