What Is Monthly Recurring Revenue?
Monthly recurring revenue (MRR) is a calculation of revenue generation by month. Many Software-as-a-Service (SaaS) companies view this as “the holy grail metric” because it conveys an up-to-date measurement of the company’s health from an income standpoint. For more in-depth insight, monthly recurring revenue can be broken into specific segments such as new business MRR, expansion MRR, and churned MRR.
Can You Have Monthly Recurring Revenue Without a Monthly Subscription?
Although the business community typically discusses MRR in terms of monthly subscriptions, it does not need to bill its customers by the month to calculate its monthly recurring revenue. MRR refers to all ongoing revenue normalized into a monthly number.
A business can charge only once a year for its services, for example, and calculate its MRR by dividing that annual fee by 12.
Why Is Monthly Recurring Revenue Important?
Businesses place a priority on monthly recurring revenue for several reasons. Here are some of the benefits.
1. Greater stability
A business with a steady MRR will enjoy improved stability as a company. A predictable income stream means the organization can be more forward-looking and ambitious in its plans. The company will not need to spend as much time and energy, preparing for how to deal with a sharp and sudden downturn in revenue.
2. Improved ability to plan and budget
Predictable monthly revenue gives a business a more accurate picture of the resources it will have for new projects. A company with a steady MRR can more confidently set budgets for developing new products and other initiatives.
3. Higher business valuation
Wall Street, as well as private-equity investors, place higher valuations on companies that have predictable monthly revenue. It’s because companies with steady MRR have demonstrated an ability to earn an ongoing relationship with customers.
For a private business in its early stages of growth, earning a higher valuation from investors can lead to higher overall investment amounts as well as more favorable terms for the company itself. For public companies or businesses preparing for an IPO, a higher valuation can mean greater investor interest and, ultimately, a higher stock price.
How Can You Increase Your Monthly Recurring Revenue?
Here are a few examples of strategies you can employ to boost your company’s monthly recurring revenue.
1. Cross-sell and upsell
If your company sells multiple products, your best customers are often the individuals or businesses already using your other products.
Similarly, if you sell several versions of a single product, at different price points, your best customers for the more expensive versions are often those paying for the lower-end product.
One way to increase your monthly recurring revenue is to market your product suite to existing customers. It can be the quickest and most cost-effective path to growing your recurring revenue. After all, you already have a relationship with your existing customers. You have permission to speak with them. You’ve established a degree of trust. Contacting existing customers is far less expensive than advertising and marketing to new prospects.
Note: The business community describes cross-selling and upselling to existing customers as “expansion MRR.”
2. Offer more pricing options
Sales-psychology experts have found that it’s possible to increase sales by offering several pricing options rather than just one.
If your company offers only one way to purchase a product, consider breaking the product into several tiers. For example, you can provide a basic version of the product, a more feature-rich professional version, and even an enterprise or power version.
Note: This can be an example of expansion MRR (because your new pricing options might persuade an existing customer to pay more for a higher-end version of the product. It can also be what the industry calls “new MRR,” or bringing in new customers.
3. Continuously improve your products
If your customers are going to continue paying for your products for the long term, you will need to continuously demonstrate to them that you are adding value to those products.
One way to grow your MRR—while reducing the loss of customers, called “churned MRR”—is to regularly improve your products and let customers know you’re doing it. Send out regular communications announcing new functionality and offer valuable training and onboarding tools to make it easy for customers to start getting value from your new features.
It can both help you reduce churn and bring in new MRR from new prospects.