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Everything you need to know about recurring revenue
No matter what role you are in at your SaaS organization, metrics are key to your success. They help you evaluate the performance of the business, teams, and individual contributors.
When looking at metrics, it is important to be able to tie it back to what matters the most to your board and investors: revenue.
Use these metrics to directly measure your company’s revenue performance.
What is recurring revenue?
Recurring revenue is the revenue your company is likely to continue to receive from customers in the future. As a subscription business, your renewable software and services revenue should count as recurring.
What is monthly recurring revenue (MRR)?
Monthly recurring revenue provides SaaS companies with a month-to-month look at how recurring revenue is growing in their subscription business.
MRR is the sum of your recurring revenue at the end of each month.
One thing to note though is that MRR might not be the ideal metric to track for longer-term subscription models since there will be natural fluctuations over shorter periods of time, but it can be a great metric for recurring revenue companies that don’t have long-term subscriptions but have month-to-month plans.
How to calculate monthly recurring revenue (MRR)
Let’s take a look at an example of how to calculate monthly recurring revenue:
- In August you have 3 customers.
- Customer #1 has been a customer for 6 months. They pay $12,000 upfront for an annual software subscription. In August, customer #1 contributes $1,000 to MRR.
- Customer #2 has been a customer for 2 months. They pay $1,000 each month on a month-to-month software subscription. In August customer #2 contributes $1,000 to MRR.
- Customer #3 becomes a customer on August 1st. They pay $24,000 upfront for an annual software subscription and an additional $3,000 for a one-time implementation fee. Since only the software cost is recurring, customer #3 contributes $2,000 to MRR.
Therefore, your total monthly recurring revenue (MRR) for August is $4,000.
What is Annual Recurring Revenue (ARR)?
Annual recurring revenue provides a high-level look at how recurring revenue or subscription business is growing over time. This is a good metric for subscription models that have longer contract durations. Unlike MRR, ARR is great for long-term planning.
How to calculate annual recurring revenue (ARR)
Annual recurring revenue is your monthly recurring revenue (MRR) multiplied by 12 (months).
Let’s take a look at a simple example of how to calculate ARR:
- Your customer subscribes to a one-year contract with monthly billing of $100 per month.
- Therefore, your ARR is $1,200.
How the customer is billed is really irrelevant to this formula. What is most important is the value of the contractual commitment. In this case, the customer is contracted for a year at a total value of 12 x $100.
How to use ARR and MRR in your financial planning for your SaaS company?
Here are some ways you can use these metrics to track performance:
- Report on the growth from new contracts, including those with different term length
- Report on net and gross expansion and contraction from existing customers
- Assess trends in your ASP (average selling price) overall and broken down by individual reps
- Report on cohorts (typically by customer start month, quarter, or year)
Learn more about other SaaS terms and metrics in our Churnopedia glossary.