Term

What is Monthly Recurring Revenue (MRR)?

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Monthly Recurring Revenue (MRR)

MRR, the abbreviation of monthly recurring revenue, refers to the financial metric that shows how much money a business gets monthly. Monthly recurring revenue is an important metric for companies that generate revenue using a subscription-based model, for example, Netflix or Spotify.

MRR is an important metric because companies are able to make sales forecasts and design a comprehensive budgeting strategy.

Types of MRR

There are five types of MRR:

  1. New MRR. This is a monthly recurring revenue that comes from new customers.
  2. Expansion MRR. This is a type of MRR, which is acquired when customers decide to upgrade their current subscription plan.
  3. Reactivation MRR. This type of MRR is received when customers decide to reactivate their subscriptions after being inactive for a certain period of time.
  4. Contraction MRR. This is a loss of a monthly recurring revenue when customers downgrade their current plan (for example, from premium to standard).
  5. Churned MRR. This is when companies lose their monthly recurring revenues due to customer’s subscription cancellation.

Ways to calculate MRR

Monthly recurring revenue can be calculated in two ways:

1.Traditional formula of MRR

This is the easiest way to calculate the company’s MRR. To obtain a monthly recurring revenue per customer, the company needs to calculate the average revenue gained from each customer and then multiply it by the number of customers. For example, if the business has 150 customers and they pay an average of 50$ the company’s MRR will be 7500$. The average revenue per customer is calculated by dividing the total revenue by the number of customers.

2.Customer-by-customer approach

This method of calculating MRR works in the case when the company has only one type of subscription or there is a small number of customers, so the total is easy to calculate. Following this approach one can simply combine the monthly payments of all customers. For example, when there are 50 subscribers who paid 25$ for the subscription, MRR will be 1250$.

 

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