Subscription services and SaaS are business models based on continuous contracts, and fixed sales occur every month. Because of the characteristics of this business model, it is possible to determine the growth potential and future potential of a business from monthly recurring sales, making it a management indicator that investors value.
The monthly sales generated in a SaaS business is called MRR. This time, we will introduce MRR and its importance in SaaS business.
What is MRR? Consists of 4 types of MRR
MRR is an abbreviation for Monthly Recurring Revenue, which means monthly recurring revenue. Specifically, it refers to sales that occur on a regular basis every month, and excludes sales that occur at spots such as initial costs for implementation, consulting fees, and additional costs.
MRR is made up of four types of MRR, which are added to the previous month’s MRR, New MRR, Expansion MRR, Downgrade MRR, and Churn MRR to determine the MRR for that month.
①New MRR
MRR attributable to new customers. To acquire new customers, we invest a certain amount of marketing budget and conduct marketing measures and sales activities. If the cost of customer acquisition is excessive, the entire business will be in the red, so New MRR is important to calculate the appropriate cost.
②Expansion MRR
The increase from the previous month’s usage fee is recorded as MRR due to existing customers. There are two patterns for a service with multiple rate plans: upgrade, where you move to a higher rate plan than the contracted plan, and cross-sell, where you contract for an additional service that is different from the existing service.
③Downgrade MRR
Like Expansion MRR, it is MRR attributable to existing customers, but it records the decrease due to downgrades, not the increase due to upsells and cross-sells. For services with multiple rate plans, there is a downgrade to move to a lower rate than the contracted plan.
④Churn MRR
Similar to the Expansion MRR and Downgrade mentioned above, this is MRR caused by existing customers, and the decrease due to cancellation/withdrawal is recorded. This applies to customers who canceled or left their membership in that month. Along with Downgrade MRR, minimizing downgrade is important for the continuation of SaaS business.
How to calculate MRR
There are two ways to calculate MRR: one using the four types of MRR mentioned above, and the other using monthly usage fees and the number of contracted customers.
①4 types of MRR
Calculate MRR by adding the calculated New MRR, Expansion MRR, Downgrade MRR, and Churn MRR to the previous month’s MRR.
MRR = Previous month’s MRR + New MRR + Expansion MRR + Downgrade MRR + Churn MRR
②Monthly usage fee and number of contract customers
This method is calculated by multiplying the monthly usage fee by the number of contracted customers. If you have multiple rate plans, multiply each rate plan by the number of contracted customers to get their total value.
MRR = Plan A fee × Number of customers subscribed to Plan A + Plan B fee × Number of customers subscribed to Plan B + ・・・
MRR is an important management indicator for SaaS business
MRR is an indicator that investors use when evaluating SaaS businesses. In a SaaS business, you can measure the growth potential and future potential of your business based on MRR, which is the monthly sales amount. Additionally, if the ratio of MRR to total sales is high, it can be said that the stability of the business is high, and medium- to long-term predictions are possible.
Investors do not place importance on all four MRRs, and the MRR they focus on differs depending on the business phase of the SaaS business. The MRR to focus on in each business phase is as follows.
① Early phase ~ Series A
We will pay close attention to New MRR in the early phase immediately after the release of a subscription service or SaaS, or in the Series A phase of expansion when awareness and customers gradually increase and accelerate further. New MRR represents an increase in new customers.
Additionally, Churn MRR does not pay close attention to the period when a business is starting up, as cancellations and withdrawals are less likely to occur. However, once a certain number of customers have been acquired, it gradually comes to be looked at as an indicator of customer continuity, along with Expansion MRR and Downgrade MRR.
② Series B to Series C
In Series B, when customer acquisition has stabilized to a certain extent and efforts are being made to expand services, and in Series C, when the business has stabilized and development of new business is underway, pay close attention to all indicators: New MRR, Expansion MRR, Downgrade MRR, and Churn MRR. Masu.
A useful metric to evaluate all four MRRs is the “SaaS Quick Ratio.” SaaS Quick Ratio represents the ratio of MRR gained in the month (New MRR and Expansion MRR) to MRR lost in the same month (Downgrade MRR and Churn MRR), as shown below.
SaaS Quick Ratio = New MRR・Expansion MRR / Downgrade MRR + Churn MRR
The larger this value is, the higher the growth potential of the business, and investors pay close attention to this indicator to ensure the health of the business.
How to improve MRR
By analyzing monthly MRR fluctuations, it becomes clear which bottlenecks are New MRR, Expansion MRR, Downgrade MRR, and Churn MRR, and it becomes easier to take measures to improve them. The improvement measures for each are as follows.
①New MRR
We will improve marketing and sales activities to strengthen the acquisition of new customers. Specifically, we will strengthen lead generation and improve the negotiation rate and closing rate by selecting and nurturing acquired leads and converting them into contracts.
What is lead generation? A thorough explanation of the differences, methods, and precautions with lead nurturing | MarketTRUNK
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②Expansion MRR
We will implement measures to increase loyalty from existing customers, leading to upsells and cross-sells.
Key points of marketing strategy with customer loyalty in mind | MarketTRUNK
③Downgrade MRR
We provide support for customers who use the service infrequently and prevent downgrades through onboarding measures that increase satisfaction.
④Churn MRR
We analyze the factors behind cancellations and withdrawals and make improvements accordingly. If the results of the factor analysis indicate that the charges are higher than those of other companies or that there are problems with the service itself, you will need to consider reviewing the service itself. Also, building a customer success system is effective in improving cancellations and withdrawals.
summary
- MRR is an abbreviation for Monthly Recurring Revenue, meaning monthly recurring revenue. Specifically, it refers to sales that occur regularly every month.
- MRR is made up of four types of MRR, which are added to the previous month’s MRR, New MRR, Expansion MRR, Downgrade MRR, and Churn MRR, and the MRR for that month is determined.
- MRR is the index that investors use when evaluating SaaS businesses, and the MRR they focus on differs depending on the business phase of the SaaS business.
- By analyzing monthly MRR fluctuations, it becomes clear which bottlenecks are New MRR, Expansion MRR, Downgrade MRR, and Churn MRR, and it becomes easier to take measures to improve them.