MRR for Everyone
SaaS+ companies are innovative companies that have embraced the subscription model but often have multiple valuable revenue streams that are do not neatly fit into a classic subscription model.
- Published by Craig Kirsch
on Saturday, November 14, 2020
SaaS⁺ ™ Companies
Much has been written on MRR and ARR its importance in today’s “Subscription Economy”. MRR and ARR and are important metrics viewed by investors and important in driving the value of the company. The reason is simple, investors like the predictability of recurring revenue.
If you are a pure SaaS company that only provides subscription services, you are familiar with ARR/MRR and this metrics may be a fair approach to valuing your and managing your company.
However, the heavy reliance on MRR/ARR makes it difficult for companies that:
- Are transitioning to a subscription model;
- Offer multiple revenue streams (such as implementation, consulting services and training); and
- Whose solution is best served through a perpetual license model. We refer to these as “SaaS⁺™ Companies”. SaaS⁺ companies often have difficulty communicating the real value of the company. Software solutions that focus solely on subscription models and the “canned” reporting capabilities that they offer do little to help the companies described above.
As a result, communicating the true value of the company and managing to important metrics is difficult.
Every day we meet frustrated CFO of companies of all sizes struggling with this communication and management challenges. Our customers have asked for and we have delivered recording and reporting capabilities to help them communicate the true value of their company and the ability to analyze these important metrics.
iZee Ltd. is a relatively new SaaS company which has consistently grown over last few years. iZee historically has offered perpetual licenses to its customers but is currently transitioning its offerings to a subscription-based model. This process will take several years.
On average, iZee charges $50,000 for a perpetual license and charges 15% annual maintenance fees on its perpetual licenses.
iZee also offers professional services for implementation, training and basic consulting.
Let’s analyze each of these revenue streams: ![MRR+Table.png](https://media.graphcms.com/e8ixcPkmQkWYW6gzxR5B | width=500)
- In the current year the company sold 50 new perpetual licenses (first year maintenance fees included)
- The company has 350 customers using their software and paying annual maintenance fees
- The company sold or migrated customers for a total of 70 subscriptions at $12,000 per year
Based on these assumptions, the company has the following revenue streams:
License Revenue $2.5 million Maintenance Fees $2.6 million Subscription Revenues $0.8 million Professional Services $0.6 million *Total Revenues* $6.5 million
Beyond Subscription Revenues
Just looking at the subscription revenues, the company has $67,000 in MRR and $800,000 in ARR. However, management feels that maintenance fees should be considered as recurring since they receive these maintenance fees for the life of the customer.
In addition, historically the company receives consulting services from all customers (both perpetual and subscription) and receives training revenues from customers (albeit the first years training revenues are higher). Management believes that these fees should be considered in their MRR/ARR but their current systems does not provide a way to present this to outside investors.
As a result, the iZee is unable to adequately communicate their true value (measured in part by their total MRR/ARR) for the portion of revenues they deem recurring.
The CFO knows that credibly communicating the recurring portion of their business requires analyzing, calculating and supporting the portion of iZee’s revenue streams that should be treated as recurring revenue.
The CFO has identified the following:
To determine the recurring revenue for maintenance fee the CFO must track the average life of the customer and compare each customer to where they are in their life cycle. For example, if the average customer life is 5 years, and a customer is in year 3, the CFO assumes that they will receive annual maintenance fees for this customer for the next two years.
As it relates to the professional services, the CFO must calculate the average amount of consulting income it receives and ideally track this separately for new customers and customers throughout their life cycle.
The process is burdensome and difficult to support for management and outside stakeholders. As a result, this calculation is done on an “as-needed” basis with no ability to manage on a month to month basis. There is no good way to analyze churn, expansion and contraction of existing customers, critical to presenting meaningful and credible MRR/ARR information.
MRR/ARR are Non-GAAP metrics and as a result, most accounting systems are not able to easily generate or provide reports to analyze MRR/ARR.
Software solutions designed for SaaS business are unable to provide information for anything other than subscription revenues. Most of these solutions simply provide canned reports that dictates a definition of MRR and are unable to evaluate MRR for companies transitioning or companies with multiple revenue streams.
Without an automated solution to automate the revenue cycle and the ability to leverage the information for GAAP and Non-GAAP reporting metrics, it is difficult to communicate the real value of your company. Manual solutions are time consuming, prone to input and formula errors and are not automatically updated to reflect real time information.
Learn more about how RevLock can handle Mixed Companies that others cannot and see for yourself the power of reports designed for your business. You no longer have to settle for canned analytics, visit RevLock to learn more.
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