What do you measure when you’re a startup that’s trying to take off 🚀? How do you know whether the rocket has enough speed and momentum, or is going in the right direction? In order to achieve long-term growth and success, it’s essential for all startups to set up a solid, accurate foundation on which they get an ongoing pulse on their financial metrics. There are plenty of metrics to keep track of, covered in our previous blog article on Must-Track Metrics for Startup Success.
Today, I wanted to zoom in on just one of these crucial metrics — Monthly Recurring Revenue (MRR) stands out as a fundamental indicator that provides valuable insights into a company’s overall performance and stability. For SaaS businesses in particular, it truly serves as the heartbeat of the company, as it captures the revenue generated from monthly subscription-based services, and you can easily see whether it’s growing or shrinking on a monthly basis. It’s no surprise that it’s one of the first metrics investors will ask for from SaaS companies.
In this article, we’ll walk through what MRR is, why it’s important, and how to calculate it. If investors aren’t already demanding this number from you, chances are you still desperately need it to track the health of your startup, and its cash flow.
MRR stands for Monthly Recurring Revenue, and refers to the revenue that a company expects to receive from paying customers on a monthly basis. For SaaS companies, many subscription-based payment plans are billed on a monthly basis. Since customers opt into the subscription or sign contracts in advance, MRR is the predictable income that a company can reliably anticipate every 30 days. Note that this would exclude any one-off fees or service charges that would not be expected every month, such as one-time set-up costs or implementation services.
MRR is a metric that’s important for CEOs and founders, as well as CROs and Revenue Operations teams. It’s a high-level company metric that helps measure the health of the overall company, as opposed to specific pipeline, so leadership teams of all startups would need to know the MRR at all times. Plus, your board of investors may be seemingly obsessed with this metric. The bottom line is that if the MRR is growing steadily, then the company is doing well. The significance of MRR lies in the following areas:
The formula for MRR is the total number of subscribers multiplied by the Average Revenue Per Subscriber (ARPU).
MRR = (# of customers) x (average monthly revenue per customer)
So, if your company has 80 customers paying $100 per month, their MRR would be $80,000.
Another way to do it is to sum up the revenue generated by each subscription plan that you offer. Let’s say, you have 3 subscription plans at the below costs:
Then, you would use this formula below:
MRR = (80 x $10) + (60 x $20) + (40 x $30) = $3,200
Once you’ve calculated your MRR, a common next step is to understand your MRR growth as well. To do this, you’ll need to split your subscription customers into sections like “New MRR” “MRR from Add-ons,” and “Churn MRR”. Then, you can follow this formula to get to your MRR growth:
Growth MRR = (New MRR + Add-on MRR) - Churn MRR
Much of the time, this calculation is done manually in Excel or Google Sheets. There’s no problem with that, especially at the start, but companies that continue to work in spreadsheets will find that it’s not a scalable way to track data and keep an ongoing pulse on key metrics. This MRR metric is not something that lives in the CRM either, as it’s not pipeline related information, and it’s not as easy as churning out a Salesforce report about it. The best way to get a real-time read on this metric is to set up a finance and sales dashboard in your BI platform.
While the formula itself may seem simple, here are some watch-outs to look out for:
It may seem easy enough to calculate this number in Excel every month and just send it across to your investors or leadership team by email. However, this involves a manual number-crunching process every single month, and manual distribution, which is taking up someone’s time. On the receiving end, it’s not that impressive seeing a single number — without the surrounding trends and narrative of the previous months, and without the ability to drill down into the number and get a deeper understanding of why it’s grown or why it’s shrunk.
We highly recommend that your company appoint one person and invest a bit of time and energy now (the earlier, the better) into setting up a data warehouse that pulls this information, and plugs into a BI platform, that will visualize this metric (and many other valuable metrics) in dashboard(s) that you can build and customize. With a dashboard in place in your company’s BI platform, this metric will always be updated in real-time, and accurate, without having to spend time and manual effort every month. You can also enable interesting visualizations in various charts that help to paint a better picture of the trends and patterns you’re seeing in MRR (and other metrics).
BI platforms like Whaly are suitable for startups who don’t have technical or data resources, and need Sales & Finance dashboards — fast. Let’s say you’re already 10 steps ahead of us, and already have a data warehouse & BI platform in place. Then what to do to distribute your data externally?
You can export or screenshot your dashboards, and input these chart visuals into a slide or document to show trends, along with a paragraph or some kind of narrative around how the MRR is going this month, and why. This will give your external stakeholders a clearer picture of what’s going on in the business.
You can also embed these dashboards into their systems that they already use. Look for embedding capabilities in your BI platform. This way, your external stakeholders can continue using the tools and channels they’re used to using, but with this dashboard embedded.
Best case scenario — you can create bespoke Portals (such as an “Investor Portal”) that contains this dashboard (and any others) and is fully tailored to them, and share this dashboard or metric in an external link. This way, they have their own “Investor Data Room” in their own link, which they can access at any time, whenever they need it. Not only does this mean you can save some time and they won’t have to bug you for this metric every month, it also shows that your company is on top of your data and leveraging data for decisions, is a huge confidence boost in your startup. If you’re looking for an easy way to create an “Investor Data Room” for your investors, check out Whaly’s free trial.
In summary, monitoring Monthly Recurring Revenue is an absolute necessity for SaaS companies aiming for sustainable growth and success. The metric not only provides valuable insights into a business's financial health but also enables data-driven decision-making, churn analysis, and investor confidence. By accurately calculating and continuously tracking MRR, SaaS companies can optimize their strategies, improve customer retention, and stay ahead of the competition.
So, what are you waiting for? Get started calculating your MRR today, and implementing steps to ensure that you can get real-time visibility into this metric. This will be extremely useful for when your leaderships teams and investors need it, and simply for you to have a great way to track your overall company heartbeat!