Revenue forecasting is critical, especially in subscription-based business models. Enter Monthly Recurring Revenue (MRR). MRR lets you predict future revenue streams for accounting, financial, and strategic ends. Read on as we explain and explore the term on this page.
What is MRR?
Monthly Recurring Revenue (MRR) is the revenue a business expects each month. This metric is especially useful for Software as a Service (SaaS) platforms, recurring membership programs, and subscription services.
MRR offers a clear overview of incoming revenue. Thus, it’s a good indicator of a company's financial health and future growth. Note that MRR is usually predictive; it refers to how much money an organization expects to make.
The Importance of MRR
MRR helps organizations in the following ways:
Stability and Financial Planning: When companies know their expected revenue, they can plan their expenses. This helps organizations that charge subscription fees mold financial strategy, taking into account both current resources and expected income.
Attracting Potential Investors: In the investment world, consistent revenue often correlates to stability. A company with a good MRR is an attractive investment opportunity. This is because a good MRR shows that the company is stable and has potential to scale upwards.
Predicting Growth: Both positive and negative movements in MRR are reliable indicators. Changes in MRR can reflect the success (or failure) of sales initiatives, marketing strategies, and new features or services.
The Relationship Between MRR and Customer Lifetime Value (CLV)
MRR is a monthly revenue projection for an entire organization. Customer Lifetime Value (CLV) is a projection of how much money a single customer makes for an organization.
High MRR and high CLV? You're on a growth trajectory with promising future profitability. However, a high MRR with a low real CLV suggests a potential leak. Customers may drop off quickly, indicating issues with product stickiness or customer satisfaction. This, in turn, can mean MRR is unrealistic.
Conversely, a high CLV but low MRR can mean two things. First, the MRR calculation may be off. Second, a business may need to expand customer acquisition efforts to take advantage of high CLV and turn it into MRR.
Mistakes to Avoid When Assessing MRR
Common mistakes to avoid include:
Double Counting: One-time charges and non-recurring revenues must not be included in MRR for it to be accurate.
Overlooking Churn: A business that fails to notice lost customers or subscription downgrades will have an unrealistic assessment of MRR.
Static Evaluation: A common trap is to depend on a fixed MRR value, without taking into account changes in the market. This mistake may result in misguided strategic decisions.
Are Sales Processes Different for Companies That Use MRR?
Sales can be seen differently through the lens of MRR. Companies that understand MRR often want to achieve more than only customer acquisition. Their focus is on sustained customer engagement to drive consistent revenue month-over-month.
For these companies, upselling and cross-selling aren't only sales tactics, but also ways to amplify revenue. Sales teams receive training that focuses on creating relationships with customers. This ensures that monthly revenue is not only stable, but that it is also growing. `
