What MRR is and isn't

MRR is not part of the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and isn’t reported to the government. It's used widely by SaaS and other companies relying on monthly recurring income for budget planning and reporting to investors.

If you don’t calculate MRR correctly, you may mislead your investors, and your financial planning may not be realistic. This could lead to a rude awakening when you realize you’ve miscalculated and wonder how it could have happened.

Why MRR is important

Recurring customers are the lifeblood of every subscription-based business. Nurturing and retaining those high-value customers through relationship building should be a primary focus. Having subscribers pay you on a recurring basis each month brings higher client retention, a predictable cash flow, and a healthier bottom line.

SaaS, streaming services, and any subscription-based business may find that collecting monthly fees from customers improves revenue compared to selling time-based plans because of the more predictable income flow generated. MRR measures that flow accurately.

What benchmarks signify success?

SaaS revenue grows on average of 4.4% monthly in the beginning. This high rate declines to 3.1% as the business grows and then goes down further to around 2% with maturity.

Venture capitalists often use the rule of 40 to gauge startups. If the MRR growth rate combined with the earnings before interest, taxes, depreciation, and amortization (EBITDA) margin is above 40, your business is healthy and could double in value.

How to calculate monthly recurring revenue

Calculating monthly recurring revenue is simple on the surface. Add up all the income produced by active subscriptions for the month, and add all the monthly totals to get the annual recurring revenue (ARR).

Correctly calculating monthly recurring revenue is critical for creating accurate financial forecasting. Mistakes arise when you attribute income to the wrong months or commit other common errors.

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Common pitfalls in MRR analysis

Here are the five most commonly made mistakes that can skew your MRR calculations.

• Including one-time payments. One-time payments are not recurring and should be reported separately.
• Failing to divide multimonth payments. Quarterly, semiannual, and annual payments should be divided by the number of months in the period and assigned the correct months.
• Including trial subscriptions. Trial subscriptions haven’t yet produced revenue and may not do so. They should be counted in the month revenue is received.
• Not calculating discounts. Discounted sales must be valued for the amount received, not the price before the discount.
• Subtracting transaction fees and delinquent charges. Delinquent accounts should be separated, and transaction fees are expenses, which are not included in MRR.

If you’re struggling with calculating MRR, using an MRR template can help you automatically build this metric using your Stripe data.