Monthly Recurring Revenue (MRR): What it is, why it’s popular, and how to calculate it

If you’re a SaaS company that has a recurring subscription model, then you’re no stranger to the ‘long, slow SaaS ramp of death’ — especially if your major ICP is SMBs or you’re an early-stage SaaS company.

Pioneered by Gail Goodman (the former CEO of Constant Contact), this phrase describes the realistic, non-linear growth pattern that SaaS companies typically experience — as opposed to the idealistic, hockey-stick growth curve they hope for

And the best way to visualize this ‘long, slow ramp’ of incremental growth, is by tracking your monthly recurring revenue over a period of time. Joel Gascoigne, the CEO of Buffer (a bootstrapped SaaS company that also caters to SMBs) echoes this sentiment in his 2023 Shareholders Letter  —

“With SaaS, there are a limited number of ways you can grow. One of the simplest equations for MRR is to multiply the number of paying customers by how much they pay per month (ARPU). Therefore, to grow MRR, you either need to grow the number of paying customers you have, or grow your average revenue per user.”

In this blog, we’ll be exploring the basics of monthly recurring revenue (MRR) — what it is, the many different ways to measure it, and mistakes to avoid when doing so. Plus, we’ll also show you how to optimize your MRR and keep up with industry benchmarks. 

But before we dive in, here’s the TL;DR — 

• Monthly Recurring Revenue (MRR) is the predictable income a business generates every month via subscriptions from active customers.
• MRR can help SaaS businesses gain insight into their overall financial health, churn rates, and even how well their value proposition is received by customers.
• The formula to calculate your MRR is simple: multiply the total number of paying customers by the average revenue per user (ARPU) per month.
• By calculating MRR across the subscription lifecycle — upgrades, downgrades, reactivations, and churn — you gain a deeper understanding of your business's growth trends.
• Some ways that you can improve your monthly recurring revenue are revamping your pricing strategy, addressing churn, and increasing your customer lifetime value.

What is Monthly Recurring Revenue (MRR)?

Monthly Recurring Revenue (MRR) is the predictable revenue that a business is expected to generate from its customers in a given month. It is a measure of all of the recurring revenue of a business normalized into a monthly amount.

While MRR is a great tool for gauging your business health, it's important to remember it focuses on revenue trends, not accounting standards. MRR won't directly impact your GAAP reports or how you recognize revenue.

Why should you measure your Monthly Recurring Revenue (MRR)?

SaaS companies can benefit hugely from tracking MRR — the chief of which is the snapshot of your growth trajectory. Plus, you get to witness the compounding effect of subscription models as the years pass by (and your Customer Lifetime Value (CLV) improves).

Gauge your revenue and growth trends

Put simply, tracking MRR over time reveals your growth patterns — and when done right, it not only helps you visualize the ups and the downs but also the whys behind them. For example:

• Do you see recurring dips or spikes in MRR during specific months?
• Did a new ad or marketing campaign lead to more subscriptions in that month?  
• Has a recent pricing update led to increased subscriptions or churn? 
• Has a new feature launch led to more upgrades or reactivations?

Here’s an X thread by Ben Robertson where he unpacks the possible reasons why the MRR increased despite a drop in website visits — 

Budget better with accurate forecasts

By tracking MRR over time, you build a historical dataset that reveals trends in your revenue stream and predicts changes in income. This way, you’ll have a better understanding of your cash flow and plan for potential dips in MRR.

A good example here is e-commerce apps that see huge revenue during the months before the Black Friday/Cyber Monday (BFCM) weekend. The following months, on the other hand, see a dip in revenue. 

A similar example is Jenni AI — an AI editing assistant for research papers — which sees a dip in MRR during summer break followed by an increase when schools reopen. 

Measure customer satisfaction (and churn) rates

Apart from revenue forecasts and financial health, the other main benefit of tracking MRR is getting a deeper understanding of customer behavior. At the basic level, a steady increase in MRR can suggest high customer satisfaction, while stagnant or declining MRR might indicate customer dissatisfaction. 

But the real advantage is in tracking MRR across different ICPs or pricing plans — this gives you a lot of nuances into which segments bring the most revenue, who has the highest Customer Lifetime Value, and who churns fast. 

This can in turn help you target the right ICPs and reduce your customer acquisition costs and eventually your churn rate — as you start reaching the right customers.

Reach product-market fit

While understanding churn is a great benefit, tracking MRR comes with an even greater benefit for early-stage companies — achieving product-market fit. Why? When you’re starting out, even the smallest changes like a feature launch or pricing update can hugely reflect in your MRR. 

By combining these fluctuations with qualitative feedback from customers, you can get a deeper understanding of how they relate to your value proposition. 

How to calculate MRR (and do it right)

There are two ways that you can calculate your monthly recurring revenue. In the first (simpler) method, you simply divide the total recurring revenue per month by the total paying customers.

MRR = Sum of recurring revenue from all customers in a specific month

However, doing it this way can get tedious, plus it can get complicated for usage-based pricing models. 

That’s why most SaaS companies prefer the second method — they multiply the total number of paying customers by the average revenue per user (ARPU) per month. Here’s how this works:  if you have 100 customers paying $10 per month, then your MRR would be $1000 (100*10). 

If you’ve got quarterly or annual subscriptions, then you can divide the total subscription value by 3 or 12 to get to your average monthly revenue.

5 mistakes to avoid when calculating your MRR

Multi-year contracts, one-time services, and custom-tiered pricing models can all make calculating MRR tricky. Here are some common mistakes to avoid when calculating your MRR —

• Adding non-monthly subscriptions at full value: Make sure to split annual or quarterly subscriptions into prorated monthly amounts to accurately reflect recurring revenue throughout the year. 
• Including free trials: Free trials don’t guarantee a subscription so exclude them from your MRR calculation to avoid inflating your numbers.
• Adding one-time fees: Setup fees, onboarding charges, or other one-time payments shouldn't be included in MRR as they aren’t recurring revenue. 
• Ignoring discounts: By not subtracting discounts, you once again inflate your overall MRR leading to misleading financial forecasts. 
• Not accounting for non-cash payments: While credit points or vouchers can be used for subscriptions, these users are considered non-paying until a traditional payment method is confirmed.

5 types of monthly recurring revenue

While simply calculating your overall MRR is a great way to get a quick overview of your financial health, tracking MRR across different ICPs or customer stages can give you richer insights into your growth patterns. 

Here are some other ways you can drill down on your MRR:

New MRR

New MRR represents the monthly recurring revenue generated by new customers acquired in a specific month. This is a great way to measure your customer acquisition efforts — especially over a short period of time like gauging whether a new campaign or feature launch was successful in bringing you new customers. 

Formula for new MRR

New MRR = The number of new subscribers * MRR earned from each one

Upgrade MRR

Upgrade MRR measures the additional monthly recurring revenue generated by active customers who upgrade their subscription plans during a specific period. Point to note — this doesn’t take into account one-time purchases like add-ons or implementation services, only subscription upgrades.

Upgrade MRR can be a valuable metric to track your upselling and cross-selling efforts and understand your business’s overall growth potential. 

Formula for Upgrade MRR

Upgrade MRR = New value of all upgraded subscriptions – Previous value of the same subscriptions

Downgrade MRR

The opposite of Upgrade MRR, Downgrade MRR focuses on the decrease in monthly recurring revenue generated by existing customers who downgrade their subscription plans during a specific period.

This can help you identify potential churn risks and take steps to address customer concerns before they cancel their subscriptions. 

Formula for Downgrade MRR

Downgrade MRR = Previous value of all downgraded subscriptions – New value of all downgraded subscriptions

Reactivation MRR

Reactivation MRR captures the monthly recurring revenue recovered from customers who previously canceled their subscriptions but have since resubscribed. This is a great metric for marketing and sales teams to assess the success of customer reactivation campaigns and get a better understanding of why they churned. 

For instance, a surge in reactivations after a discount might suggest a need to revisit your pricing strategy. Alternatively, reactivations following a new feature launch could highlight gaps in your existing platform functionalities.

Formula for Reactivation MRR

Reactivation MRR = Sum of the revenue from new subscriptions by reactivated customers 

Churn MRR

Churn MRR represents the monthly recurring revenue lost due to customers canceling their subscriptions during a specific period. A low Churn MRR indicates a healthy customer base with strong retention, while a rising Churn MRR suggests potential issues with customer satisfaction. 

Formula for Churn MRR

Churn MRR: The total value of canceled subscriptions in a month

Net New MRR

A subset of MRR, Net New MRR focuses on the net increase in your monthly recurring revenue by comparing the new revenue gained per month (from new customers, reactivations, and upsells) with the revenue lost (from downgrades and churn).

Formula to calculate Net New MRR

Net New MRR = (New MRR + Upgrade MRR + Reactivation MRR) - (Downgrade MRR + Churned MRR)

To gain an even more granular understanding of your customer base and identify key growth levers, we suggest calculating these MRR metrics for different pricing plans and customer ICPs.

Related reading: What is ARR and how to calculate it

4 ways to improve your Monthly Recurring Revenue (MRR)

The higher your monthly recurring revenue (MRR) and Net New MRR, the better your business’s overall financial performance. 

But increasing your MRR growth rate requires consistent, steady effort — so much so that while most industry experts recommend an MRR growth rate of 10-20%, very few SaaS companies touch 20%.  

Here are some tips that can help you ramp up your MRR growth rate —

Sunset your free plan

While the free plan is a great tool for PLG companies looking to give customers a low-commitment option, they can sometimes do more harm than good. 

For one thing, free users also require ongoing support and resources. But if they don’t show a high enough upgrade MRR, then you’re probably leaking more money than you're earning.

For example, 37 Signals pays over half a million dollars per year for database (RDS) and search (ES) services from Amazon for their email hosting platform, HEY. They mention this cost factor to be one of the reasons they’re moving away from the cloud. 

While this might not be a doable alternative for most SaaS companies, swapping a free plan with a free trial can be a great middle-ground — something 37 Signals does with another of their platforms, Basecamp. In 2022, they replaced their free plan with a 30-day free trial.

Restructure your pricing 

The math is simple — the higher your pricing, the higher the MRR. When Buffer moved their customers from the legacy plan to the new plan, they saw a $15,000 increase in MRR.

While simple price hikes help, a more sustainable way to revamp your pricing model would be value-based pricing. Ask yourself the question — how much would a customer pay for your platform and fix a price that reflects the ‘value’ you provide them.

Also, as value is subjective, you might have to implement tiered or usage-based pricing to cater to different customer segments (ICPs). That way, you offer an attractive entry point for new customers and provide a clear upgrade path for existing ones.

Diversify your revenue streams

If price hikes are one way to increase MRR, then multiple revenue streams are another. And this is a strategy that’s common with most SaaS companies in their ‘scale-up’ mode. Take any SaaS company — Hubspot, Twilio, Zoho, Salesforce — they’ve all gone from single-product companies to all-in-one suites as a way to grow their revenue and increase their market share. 

Here’s Jason (of Saastr) unpacking why not having a second product is one of the reasons for Dropbox’s slow growth rate:

While this is specific to DropBox’s ARR growth rate, we can make the same case for MRR as well.

Improve customer relations (and reduce churn)

Industry experts recommend keeping your churn rate under 7%, though they suggest early-stage companies go even lower and keep it at 3-5%. This keeps your net new MRR positive. While the reasons your customers are churning can vary from company to company, here are the three main reasons:

• Inadequate customer support and onboarding
• A mismatch between value (features) and pricing 
• Confusing user experience or clunky UI

Address these concerns, reduce your Churn MRR, and your Net New MRR automatically goes up. 

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 Take the above example — Hubspot was able to increase both its MRR and Customer Lifetime Value metrics by lowering its Churn MRR from 3.5% to 1.5%.

How does Zenskar help?

The key to nailing financial metrics like MRR is ensuring they take current data into account — especially important when you have usage-based or hybrid pricing models where fluctuations are pretty much inevitable. 

The solution? A modern billing system — like Zenskar — which not only syncs usage data in real-time but also provides out-of-the-box reports like:

•  MRR for different user groups
• Usage patterns and trends
• Churn metrics
• Revenue forecasting

It also integrates with top CRM, accounting, and ERP tools — so you can avoid outdated or siloed data and track your MRR more accurately. Moreover, Zenskar takes up custom integrations on request, so you can easily integrate it with the rest of your tech stack. 

Curious to learn more? Book a demo with our product experts and see how Zenskar simplifies MRR calculations.

Frequently asked questions (FAQs)

1. What is the difference between MRR and ARR?

While MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) are both key metrics used by subscription-based businesses to track revenue, they differ in their time frame and focus. 

MRR measures the predictable revenue generated from subscriptions in a specific month. It is great for tracking your short-term revenue performance and identifying any month-to-month fluctuations.

ARR, on the other hand, estimates the total predictable recurring revenue a business expects to generate in a year. It is a valuable metric for communicating the overall health of your business to investors or stakeholders.

2. What is the formula to calculate monthly recurring revenue (MRR)?

To calculate the MRR for your business, you have to simply multiply the total number of paying customers by the average revenue per user (ARPU) per month. 

3. What is a good MRR growth rate for SaaS companies?

While the ideal Net MRR growth rate varies by industry and company stage, experts generally recommend a range of 10-20%.

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