MRR, an acronym for Monthly Recurring Revenue, is a frequently cited and important startup metric. From my experience as an active angel investor and cofounder of MergeLane, an accelerator and fund for high-growth startups with at least one woman in leadership, Monthly Recurring Revenue is often misunderstood and miscalculated. Below is a simple guide to understanding and calculating MRR.
MRR is income that a company can reliably anticipate every 30 days. Revenue from one-time purchases billed at the time of purchase is not included in MRR. This metric is only applicable to companies that provide services to their customers through an ongoing contractual relationship. This includes SaaS companies and any other subscription-based services such as gym memberships or box-of-the-month clubs, as well as service providers such as marketing, law and accounting firms that offer multi-month retainers.
There are two main ways that Monthly Recurring Revenue can be calculated.
The MRR Formula for the Most Accurate Calculation
For the most accurate calculation, MRR should be calculated on a customer-by-customer basis. For example, if Customer X is paying $65 per month and Customer Y is paying $100 per month, and both customers have subscribed to an annual plan, then Monthly Recurring Revenue would be equal to $165 per month. This approach is the most accurate way to calculate MRR and is the best formula for companies with very few customers.
The MRR Formula for the Most Efficient Calculation
If, however, a company has numerous customers paying numerous prices, the previous MRR formula can be very tedious to calculate. In this scenario, it likely makes more sense to calculate Monthly Recurring Revenue by multiplying the total number of paying customers by the average of the amounts paid by each customer each month (known as the Average Revenue per User or ARPU).
If Company X has 30 customers paying an average of $100 per month, its Monthly Recurring Revenue would be equal to $3,000 per month.
If a company is billing on a quarterly or annual basis, the average price per month should be used in the equation. Monthly Recurring Revenue can be zero or a positive number but cannot be negative. MRR always refers to recurring revenue on a monthly basis. Quarterly or annual MRR typically refers to the average MRR for the specified time period.