If you run or are considering launching a subscription-based business, you’ve probably heard the term ‘monthly recurring revenue’ (MRR) tossed around.
But what exactly is it, and how can understanding it transform your business?
As a subscription business ourselves, at Checkout Page we know firsthand that mastering MRR is pivotal to success.
Below, we'll explain what MRR is, how to calculate it, and offer five simple but powerful strategies to increase it.
By the end of this article, you’ll have a good understanding of all things MRR and, most importantly, how to use it to grow your business successfully.
What is monthly recurring revenue (MRR)?
Monthly recurring revenue is a key metric a subscription-based business uses to measure the predictable and recurring revenue generated from customers every month.
Unlike one-time sales, MRR provides insights into a business's stability and growth potential by focusing on recurring customer income.
Why MRR matters
As a metric, MRR is a vital tool for:
- Forecasting revenue: Predicting future income and planning budgets confidently, armed with data.
- Tracking growth: Measuring how your business is growing month by month.
- Making strategic decisions: Identifying trends, spotting problems, and optimizing your business strategy.
MRR is the lifeblood of any subscription-based business, so careful attention to this metric is needed to monitor your financial health.
How to calculate MRR
The good news is that calculating MRR is straightforward. The basic formula is as follows:
Example:
If you have 200 subscribers and your ARPU is $15 per month, the calculation would be:
- 200 subscribers × $15/subscriber = $3,000 MRR
Handling tiered pricing
If, like many subscription businesses, you offer multiple plans (e.g., Launch, Grow, Scale), you would calculate MRR by adding up the monthly revenue from each plan.
For example:
- 100 customers on a $10/month plan= $1,000
- 50 customers on a $20/month plan= $1,000
- 30 customers on a $30/month plan= $900
- Total MRR = $2,900
MRR vs. ARR: What’s the difference?
While MRR measures predictable monthly income, annual recurring revenue (ARR) projects your predictable yearly revenue based on subscriptions.
While MRR is ideal for tracking short-term performance, ARR provides a long-term view of growth and scalability.
Understanding both metrics is essential for making informed decisions and planning for the future.
What is ARR?
- Definition: ARR measures your business's predictable revenue from subscriptions over a year.
- Formula: ARR = MRR × 12
- Use case: ARR is better suited for long-term financial planning, annual budgeting, and communicating revenue stability to investors or stakeholders.
Why both metrics matter
MRR helps you stay agile and responsive to short-term changes, while ARR provides a big-picture view of your revenue potential. By tracking both, you’ll be set to make informed decisions that balance your business's immediate needs with more long-term goals, such as taking on new employees.
When to use MRR vs. ARR
- Consider your revenue model: Use MRR if you want to keep an eye on your monthly cash flow and how well you're retaining customers, especially if you have a subscription service. On the other hand, ARR is great for long-term revenue stability, especially if your customers sign annual contracts.
- Investor preferences: Investors usually like ARR better because it gives a clearer picture of your long-term prospects, while MRR can show them how you're growing right now.
- Flexibility: Startups might find MRR helpful for adjusting quickly to changes in the market, while established businesses can use ARR to show they’re consistent over time.
Why MRR matters for subscription businesses
Your monthly recurring revenue isn’t just a metric—it’s a vital indicator of your business’s health, stability, and growth potential.
By tracking your MRR, you’ll gain insights into your revenue streams, customer behavior, and overall financial performance. Here’s why MRR is a cornerstone of any subscription-based business:
Predictable cash flow
MRR provides a clear picture of your expected monthly income, allowing you to forecast revenue more confidently. This predictability makes it easier to manage expenses, allocate resources, and plan for future growth.
Whether budgeting for new hires, marketing campaigns, or product development, MRR supports you in making decisions based on solid data.
Easier to scale
A strong MRR signals to investors that your business has a reliable, scalable revenue model and provides the foundation for sustainable internal growth. For investors, a consistently growing MRR demonstrates stability and readiness for expansion, making your business an attractive opportunity for potential funding or partnerships.
Beyond external stakeholders, MRR empowers you to scale operations efficiently by spotting revenue trends, honing resource allocation, and reinvesting profits into areas like marketing, product development, or customer acquisition.
Better understanding of customer lifetime value (CLV)
Tracking MRR enables you to calculate how much revenue a customer generates over their lifetime, which gives you a clear picture of your customer lifetime value (CLV).
This helps you to identify your most valuable customers, and then tailor your marketing efforts to attract similar customers.
Additionally, understanding CLV helps you formulate customer retention initiatives, such as personalized engagement or loyalty programs, ensuring you retain your most profitable customers for the long haul.
Types of MRR
MRR isn’t a one-size-fits-all metric. To get a more comprehensive picture of your monthly revenue streams, you need to know how to break them down into different types.
Understanding these categories allows you to pinpoint improvement areas and develop more targeted growth strategies.
Here’s a definition and example of each type:
New MRR
- What it is: Revenue generated from new customers who sign up for your service.
- Why it matters: New MRR reflects your ability to attract new customers and grow your customer base.
- Example:
- If 10 new customers sign up for a $50/month plan, your New MRR is $500.
Expansion MRR
- What it is: Additional revenue generated when existing customers upgrade their subscriptions or purchase add-ons.
- Why it matters: Expansion MRR shows how well you maximize revenue from your current customer base.
- Example:
- If 5 customers each upgrade from a $50/month plan to a $75/month plan, the calculation for Expansion MRR would be based on the increase in their payments.
- The difference per customer is $25 ($75 - $50), so for 5 customers, the Expansion MRR would be $125 (5 customers x $25 increase).
Churn MRR
Churn is the rate at which subscribers cancel their subscriptions.
- What it is: Churn MRR is revenue lost due to customers canceling their subscriptions.
- Why it matters: It can help you identify retention issues and strategize ways to reduce churn.
- Example: If 3 customers cancel their subscriptions, and each was on a $50/month plan, the correct calculation for Churn MRR would be:
- Revenue lost per customer: $50
- Total customers who canceled: 3
- Churn MRR = 3 customers x $50/customer = $150
Reactivation MRR
- What it is: Revenue that is regained when previously churned customers resubscribe.
- Why it matters: Reactivation MRR shows the effectiveness of your re-engagement efforts.
- Example: If two former customers resubscribe, and each returns to a $50/month plan, the calculation for Reactivation MRR would be:
- Revenue per customer: $50
- Total customers reactivated: 2
- Reactivation MRR = 2 customers x $50/customer = $100
Contraction MRR
- What it is: Revenue lost when existing customers downgrade their subscriptions or remove add-ons.
- Why it matters: Contraction MRR indicates dissatisfaction or changing customer needs.
- Example: If four customers downgrade from a $100/month plan to a $50/month plan, the calculation for Contraction MRR would be:
- Revenue lost per customer: $100 (original plan) - $50 (new plan) = $50
- Total customers downgrading: 4
- Contraction MRR = 4 customers x $50 lost per customer = $200.
Net new MRR
- What it is: The overall change in MRR after accounting for New MRR, Expansion MRR, Churn MRR, and Contraction MRR.
- Why it matters: Net new MRR provides a clear picture of your revenue growth or decline.
- Formula: Net new MRR = (New MRR + Expansion MRR) - (Churn MRR + Contraction MRR).
- Example: If you have the following:
- New MRR: $500
- Expansion MRR: $250
- Churn MRR: $150
- Contraction MRR: $200
- Applying the numbers to the formula would look like:
- Net New MRR = ($500 + $250) - ($150 + $200)
- Net New MRR = $750 - $350
- Net New MRR = $400.
As you can see, each type of MRR metric highlights specific aspects of your business, from acquiring new customers and growing existing accounts to identifying retention issues and measuring overall growth.
By breaking down MRR this way, you’ll be better able to pinpoint strengths, address weaknesses, and make data-driven decisions to keep honing your business.
5 ways to increase MRR
Growing your MRR isn’t just about acquiring more customers—it’s about maximizing the value of each customer.
While increasing your subscriber base over time is essential, optimizing each aspect of your subscription model is the key to sustainable growth.
Let’s look at 5 proven strategies to help you grow your MRR effectively:
1. Review your pricing strategy
Pricing is one of the most powerful levers for growing MRR. Consider the following aspects when reviewing pricing:
Pricing tiers
Experiment with different pricing tiers to find the model that maximizes revenue while meeting customer needs. Consider offering annual plans with a discount to incentivize longer-term commitments, boosting MRR, improving cash flow, and reducing churn.
Review free plans
Free plans can be a mixed blessing. While they help attract attention and create brand awareness, they often generate minimal direct revenue.
Rather than relying on free accounts, consider implementing time-limited trials or freemium models that demonstrate the value of your service and create urgency for users to switch to paid plans.
Increase your pricing
Raising prices can be a game changer for increasing MRR, but many startups hold back because they lack confidence in the value of their product.
Take the time to really understand your product's worth, costs, and what competitors are charging. A price increase isn't as scary as it seems. You might lose a few customers, but many will recognize the higher price as a sign of improved quality or service.
By communicating transparently about the reasoning for the change—like highlighting new features or enhancements—you can keep loyal customers on board while giving your MRR a much-needed boost.
2. Upsell and cross-sell
Your existing customers are your most valuable asset and much easier to sell to than customers who don’t yet exist!
Encourage them to upgrade to higher-tier plans by highlighting the additional value they’ll receive.
Offer add-ons or complementary products to increase the average revenue per user (ARPU). For example, If you run a fitness subscription business, you could offer 1:1 coaching sessions as an upsell.
3. Focus attention on customer retention
Retaining customers is far more cost-effective than acquiring new ones. Reduce churn by improving customer support and onboarding to ensure subscribers see the value of your product early on.
Think about implementing loyalty programs or incentives for long-term subscribers, such as exclusive content, discounts, or early access to new features.
Happy, engaged customers are much more likely to stay—and spend more.
4. Acquire more customers
While retention is critical, acquisition still plays a vital role in growing MRR.
Invest in targeted marketing campaigns to attract high-quality leads who are likely to convert into paying customers.
Utilize referral programs in order to turn your existing customers into advocates by rewarding them for bringing in new subscribers. Word-of-mouth marketing is not only cost-effective but also builds trust and credibility.
5. Diversify revenue streams
Don’t put all your eggs in one basket by relying solely on one product or service.
Expand your offerings to include new products, services, or features that complement your core subscription.
For example, if you run a membership site, consider adding digital downloads, online courses, or live events. You can also bundle products or services to increase perceived value and encourage higher spending.
By taking on board these strategies, you’ll grow your MRR and build a more resilient, scalable subscription business.
Remember, the goal is to create a win-win situation where your customers see and gain value from your offerings, and your business thrives as a result.
Common MRR mistakes to avoid
Even experienced entrepreneurs can make mistakes when tracking and growing MRR. Here are three common pitfalls to watch out for:
Overlooking churn rates
Losing customers can quickly erode your MRR. Track your churn rates and address the root causes that led to them (e.g., poor customer experience or lack of value).
Failing to track different types of MRR
Don't forget to track other metrics covered above, like:
- New MRR: Revenue from new customers.
- Expansion MRR: Revenue from existing customers upgrading their plans.
- Churned MRR: Revenue lost from cancellations.
Not using the right tools
Manual calculations and spreadsheets can lead to errors. By utilizing functionality built into platforms like Stripe, you can automate MRR calculations, reduce errors, and gain deeper insights into your business performance.
Challenges and considerations in MRR
While MRR is a powerful metric, it has challenges and limitations. Here’s what you need to know:
Limitations of MRR as a sole metric
MRR provides an essential snapshot of your recurring revenue but doesn’t tell the whole story. Here’s why:
- It doesn’t account for profitability: MRR focuses on revenue, not expenses. A high MRR doesn’t necessarily mean your business is profitable.
- It ignores one-time revenue: MRR excludes one-time sales or setup fees, which still contribute to your overall revenue.
- It doesn’t reflect customer satisfaction: A high MRR doesn’t guarantee happy customers. Poor service levels or inadequate product quality can lead to churn over time.
To get a comprehensive view of your business health, combine MRR with other metrics like:
- Customer lifetime value (CLV): Measures the total revenue a customer generates over their lifetime.
- Churn rate: Tracks the percentage of customers who cancel their subscriptions.
- Net revenue retention (NRR): Measures revenue growth from existing customers, accounting for upgrades, downgrades, and churn.
Common errors in MRR calculation
Calculating MRR accurately can be tricky. Here are some common mistakes to avoid:
- Including one-time payments: MRR should only include recurring revenue. One-time sales or setup fees should be excluded.
- Subtracting transaction fees: While it’s tempting to subtract fees (e.g., payment processing costs) from MRR, this can distort your revenue metrics.
- Including trial users: Free users shouldn’t be counted in MRR until they convert to paying customers.
- Ignoring discounts: If you offer discounted plans, your MRR should reflect the discounted amount, not the full price.
MRR and accounting standards
It’s important to note that MRR isn’t recognized by formal accounting standards like GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). This means:
- MRR isn’t reported on financial statements: While MRR is helpful for internal tracking, it’s not part of official financial reporting.
- It’s not a substitute for cash flow: MRR measures recurring revenue but doesn’t account for cash inflows or outflows.
Benchmarking MRR
Benchmarking your MRR against industry standards can provide valuable insights, but it’s not always straightforward. Factors like market conditions, customer demographics, and business stage can all impact your MRR growth rate. For example:
- Startups may aim for higher MRR growth rates (e.g., 100%+).
- Established businesses may focus on steady, sustainable growth (e.g., 20-30%).
How Checkout Page can help you grow your MRR
If you’re running a subscription-based business, Checkout Page is designed to help you succeed. As our name suggests, we enable you to create no-code, high-converting checkout pages with numerous billing options, including subscriptions.
We pride ourselves on ease of use and flexibility, putting the tools you need in your hands to track your MRR and grow your business.
With Checkout Page you get:
- Easy subscription management: Set up and manage recurring payments with features like tiered pricing, free trials, and billing anchors.
- Customizable checkout pages: Create branded, mobile-optimized checkout pages to improve conversion rates and build customer trust.
- Customer portal: Let customers self-manage subscriptions, update payment methods, and access digital products in our customer portal, reducing churn.
- Analytics: Track MRR, churn rates, and customer behavior with detailed reporting in Stripe, which Checkout Page is built on.
- Upsells and order bumps: Increase ARPU with one-click upsells and order bumps.
- Seamless integrations: Connect with tools like Zapier, and Google Analytics to streamline operations and scale your business.
- Top-notch customer support: Our founder-led support team is on hand via Live Chat to ensure you are set up to get the most from our platform.
So, ready to start growing your monthly recurring revenue?
Try out Checkout Page today by signing up for our free 7-day trial - card needed. Just connect your Stripe account and you are ready to start selling subscriptions.
