I Want my MRR
SaaS companies understand the importance of “Monthly Recurring Revenue” (MRR). One of the challenges of calculating MRR is that MRR is not a GAAP concept and hence there is not a standard definition for it and it is generally not captured or computed by accounting packages.
- Published by Craig Kirsch
on Friday, October 9, 2020
SaaS companies understand the importance of “Monthly Recurring Revenue” (MRR). In its simplest form, MRR is a measure of the predictable and recurring components of your subscription business and is typically compared to year over year or month to month for management purposes. Management and investors are interested in the MRR analytics always looking for companies with sustainable MRR growth.
One of the challenges of calculating MRR is that MRR is not a GAAP concept. This presents two major challenges to CFOs and accounting departments:
- Since it is not a GAAP concept, financial accounting packages do not adequately track the components required to calculate MRR; and
- There is no accepted standard of calculating MRR (in other words different companies calculate it differently).
Despite the varying ways companies compute MRR, in general, MRR includes the following components:
EXISTING CUSTOMERS MONTHLY REVENUES
- MONTHLY REVENUES FROM NEW CUSTOMERS
- EXPANSION (UP SELL MONTHLY REVENUE FROM EXISTING CUSTOMERS)
- CONTRACTIONS (DOWN GRADE MONTHLY REVENUE, NON-RENEWAL, ETC. ) = MONTHLY RECURRING REVENUES
This formula can be depicted graphically
Or in chart format
Clearly MRR will change from month to month and year to year. Healthy growing companies have a “Net Increase” in MRR. In other words, new monthly revenues from new customers and/or expansion is greater than monthly revenues lost due to lost customers and/or reduction in monthly subscription
Although there is some value in seeing the net change in MRR on a company-wide basis this macro view provides limited insight to management and/or outside investors. Understanding the underlying information provides much greater value. The ability to view changes in MRR based on product, industry served, sales channel and down to the salesperson level can shed much more valuable insights. A greater level of insight provides the information management needs to run a successful company and helps companies communicate the value it is creating to the outside world.
Let’s look individually at the important information provided by a more granular approach to calculating and analyzing MRR:
Product – Different products have different economics; the impact on MRR for premium products are certainly different than a less expensive basic product.
Industry – The ability to look at the changes in MRR by industry helps companies better understand respond to the needs of a particular industry.
Sales Channel – Understanding the channels contributing to changes in the MRR are important for at least several reasons:
Different channel partners have different customer acquisition costs (which directly impacts gross margin)
This analysis (especially combined with information on a product basis) helps identify the most efficient sales channels. The analysis can identify trends that might otherwise be overlooked.
Trends related to renewals, lost customers, up sells and contractions identified by sales channel allows management to better manage these relationships and the overall effectiveness of various channels.
The important point here is that it is critical to look deeper than the macro changes in MRR to effectively gauge and react to market realities.
The information needed to properly calculate and analyze MRR will not simply come from your financial reporting system (remember MRR is not a GAAP concept) and using revenue information from your accounting system will not adequately reflect MRR without manual adjustments. For example, partial month revenue for new customers as illustrated below:
Relying solely on revenue from your accounting system understates the MRR by 60%. Although the accurate number can be manually calculated, this manual process must be done each month and the most financial systems will not provide the level of granularity outlined above. In other words, the process is burdensome to perform and limited in its value.
This a very simple example of the limitations surrounding your financial reporting packages (based solely on the contract date). Now consider attempting to gather and analyze information on a much more granular level. Your accounting system simply does not have the capabilities to quickly and effectively give you the information that you need to critically analyze what is important to you.
Spreadsheets and software solutions that only offer canned reports provide little value to your business. Companies need and are looking for flexible reporting that measure how you do business. Anything less is like leaving money on the table.
REVLOCK automates the revenue cycle and provides unsurpassed analytics easily customized for your business. Visit us at www.rev-lock to see how RevLock was built for you and your business. Say goodbye to canned reports and say goodbye to manual spreadsheets. Make managing your business a fair fight.
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