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Metrics Matter: unravelling the Mystery of MRR and ARR

Bijgewerkt op: 30 mei 2023

In the rapidly evolving Software as a Service (SaaS) landscape, understanding and measuring the right metrics is crucial for the success of your business. Two critical metrics that every SaaS company should have on their radar are Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). In this blog post, we'll dive into the nitty-gritty of MRR and ARR, their calculation methods, and the key attention points to consider while working with these metrics.


Understanding MRR and ARR


MRR and ARR are financial metrics that help SaaS companies gauge the health and growth of their subscription-based business. They provide insights into the predictable and recurring revenue generated by a company over a specific period. Moreover, both are key metric investors use in valuing your business.

MRR represents the total recurring revenue generated by a company in a single month, excluding one-time payments, discounts, and refunds. ARR can be calculated by multiplying your MRR times twelve. In this post we therefore focus on MRR.


Calculating and understanding MRR


The basis of calculating MRR are signed contracts (bookings), which represent committed revenue generated from new clients. This committed revenue can consist of both one-time and recurring fees. MRR solely focusses on the recurring component. When a business doesn’t sign contracts with all clients, MRR can be derived from the invoiced amounts.


When calculating MRR, it is crucial to normalise any amount for one-off fees or discounts and to convert it to represent a monthly value. For instance, when you sign a yearly contract for €15,000 including a €3,000 setup cost, the MRR can be calculated by subtracting the setup cost (€3,000) and dividing the remaining amount by twelve since this concerns a yearly contract. So the MRR would be €1,000 while the ARR is €12,000.


MRR calculations can be broken down into four main components which add an additional layer of insight: new MRR, expansion MRR, contraction MRR, and churned MRR.

  • New MRR: the revenue generated by new customers during a given period

  • Expansion MRR: the revenue generated by existing customers who have upgraded their plans

  • Contraction MRR: the revenue lost from existing customers who have downgraded their plans

  • Churned MRR: the revenue lost due to customers cancelling their subscriptions.

Net MRR = New MRR + Expansion MRR – Contraction MRR - Churned MRR


Segmenting MRR


Segmenting your client base is an essential step in understanding and optimising MRR and ARR for your SaaS business. By breaking down your customers into different segments, you can uncover valuable insights about revenue performance across various customer groups. This information will enable you to make informed decisions, tailor your product offerings, and target your marketing efforts more effectively. There are different ways to segment your customer base:

  • Customer Type Segmentation: group your customers based on their types, such as small businesses, enterprises, or individual users

  • Pricing Plan Segmentation: analyse the MRR and ARR generated by different pricing plans to identify the most popular and lucrative plans

  • Geographical Segmentation: by segmenting customers based on their location, you can identify regional trends in MRR and ARR performance

  • Industry Segmentation: grouping your customers by industry can provide insights into which industries are generating the highest MRR and ARR

  • Customer Acquisition Channel Segmentation: analysing MRR and ARR by customer acquisition channels (e.g., organic search, paid advertising, referrals) can help you identify the most effective channels for attracting and retaining high-value customers

  • Customer Lifecycle Segmentation: by examining the MRR and ARR performance at different stages of the customer lifecycle (e.g., trial users, new customers, long-term customers), you can identify the points in the customer journey where revenue growth or churn may be occurring

In conclusion, segmenting your client base is crucial for gaining a deeper understanding of MRR and ARR performance across various customer groups. By analysing these metrics across different segments, you can identify opportunities and challenges within your customer base, tailor your product and marketing strategies, and ultimately drive revenue growth for your SaaS business.


Conclusion


MRR and ARR are indispensable SaaS metrics that provide valuable insights into your company's recurring revenue performance. By understanding how to calculate them accurately and taking the critical attention points into account, you can make data-driven decisions to fuel your company's growth. Remember, the key to mastering these metrics is continuous monitoring, analysis, and optimisation.


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