Understanding Change in MRR
Change in MRR, even when it is increasing is really made up of several different parts that you need to dig into to reveal the true story behind what is happening in your recurring business.
- Published by Craig Kirsch
on Tuesday, November 24, 2020
MRR is the lifeline for a SaaS based company. It is actually what makes SaaS so appealing to investors. By definition MRR is the recurring revenue normalized to a month amount.
From this general definition it is a very straight forward metric but when looked at it more closely there are several other components that can be interesting to your business.
MRR is always compared again a period of time. In our discussion today we will look at the change compared to prior month, call it month over month or MoM.
Introducing iZee Ltd.
iZee Ltd. is a relatively new SaaS company which has consistently grown over last few years. Their product is called Concepts Micro and it’s a data warehousing tool targeted to mid-market businesses. They sell SaaS subscriptions for 1, 2 and 3 years period. Client’s may end up buying training and other professional service as part of sale.
The company classifies customer into 3 Tiers.
- Annual revenue less than 10 million are in Tier 3.
- Annual revenue between 10 & 25 million are in Tier 2.
- Annual revenue greater than 25 million are in Tier 1.
Since 2015 company pricing was based on the number of users sold. Mid 2017 they introduced a new pricing model which requires customers to buy an additional "platform license" as a base item and then to buy user licenses. The platform license comes with a slew of additional security and monitoring features. This was the company’s answer to ‘How to increase MRR?’.
In this post we will attempt to de-clutter iZee's MRR change over last year and will make an attempt to find the impact of this change of pricing on the overall business.
MRR Trend – It’s growing
Here is the monthly MRR trend for iZee Ltd. As it can be seen from the upward trend that MRR is growing month over month. This is a good sign, and everything seems to be going great.
MRR Growth Rate
If you are an executive at iZee, you can relax and let the things roll as it is.
But when you look closely, all is not well. From the chart above MRR is growing but the curve is trending downwards. This brings us to the next most important metric MRR Growth Rate.
As you can see the MRR growth at the same time in the previous year was almost at the 8%, vs today it down to 1%. Clear sign that something is not right. The executives in the company should be worried and need to look deeper to find out what is the underlying cause.
Business has grown over the last few years, and as a result we can see MRR grow, but there are concerns as the growth rate has started to fall. It track not only the top-level MRR but also what component that makes up the change in MRR.
Factors that make up the change in MRR
Before we dive in let’s learn about the factors that typically contributes to MRR change.
If a company adds $50,000 in new MRR, it is important to understand where the growth came from. Is it new sales? Are there upsells? Has our loss rate just decreased, and it makes it seems like we are growing?
Let’s define the components that can have a positive or negative effect on MRR.
- New —MRR from new customers.
- Expansion — Additional MRR from existing customers, upsells or upgrades
- Loss — MRR lost from cancellations or leaving customers.
- Contraction – MRR lost from price drops or less units sold.
If your Loss + Contraction is more than New + Expansion, you end up losing MRR that month. If this continues month after month the business is going down.
Let’s find reason for the dip…
Here is the breakdown of the MRR change for each month over last year for iZee Ltd.
There are few questions that immediately come to mind.
1. There is clear customer churn that needs to be addressed.
- What is this? Which customers are leaving? Is it due to competition? Is it due to a price increase?
2. It also shows MRR contractions, which has everything to do with renewals.
- Is it due to price drop on renewal?
- Or is it due to volume?
- Is it because the product is not performing as needed?
Understanding Loss & Contraction @ iZee Ltd.
The breakdown above is pretty useful. Let’s try to look at what constitutes the MRR churn between Jun-18 through Oct-18
All four customers which canceled are from Tier 3, i.e. ones with annual revenues of less than 10 million. What this tells us is that customers in this segment have been cancelling after iZee introduced a new pricing model. This can be due one or all of the following reasons.
- Customer with smaller revenue number are sensitive to pricing and are not willing to pay any more money.
- The new product offering with additional platform feature are not desired. There is competition in the market that serves the need at price that is presumably better.
We see only one Tier 1 customer that has no contraction, which means Tier 1 customer have generally not responded negatively to the price hike.
Most of the contraction is in Tier 2. Even though tier two customers are renewing their over all MRR has decreased. Let’s dive a little deeper and check what actually is happening for these customers. For the sake of simplicity let’s just look at Aug-18 and Sep-18.
We see that there are two completely different trends here
Customers have opted to sign a longer-term contract in order to get multiyear discounts. This proves that even if customers are offered additional feature, they are not willing to pay more for these features. Different companies would interpret this differently but to me that’s a loss and needs to be addressed.
Renewals in the picture above will get most people worried, half of the MRR value was not renewed. The answer lies in the contract, where these two customers lowered their number of users to almost half of what they bought initially causing there MRR to go lower.
This was a useful activity. It enabled iZee Ltd. to derive some pretty actionable conclusions. Essentially, we find ourselves with three theories.
- Tier 3 customers are leaving because of collective price increase.
- Tier 2 (and some Tier 1) customers are able to avoid price increase due to platform license by signing up for multiyear discounts.
- Tier 1 customers are happy with the product and they see value in the new platform features.
Looking back at what we have done here, it is pretty clear that tMRR metric at a given time isn't that useful. It's just a number. How this number is changing over time is where the real value is. Additionally, a chart that plots MRR change provides an excellent broad view, but it's essentially just the starting point. It required us to enrich data, study each component of change, slice the data into segments like tiers in case of iZee company. It is safe to say that the process to get to these conclusions was complex and requires a tool that allowed on the spot data augmentation, slicing and dicing etc. Luckily, at iZee they had RevLock, an ultimate tool for SaaS reporting.
In our next article we will look at how iZee company reacted to these conclusions. We will also create reports for iZee company to keep monitoring the result of these changes at each tier of customer.
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