Goal of the analysis:
The goal of Monthly Recurring Revenue (MRR) Growth Rate analysis is to measure the percentage increase (or decrease) in MRR over a period of time. MRR represents the predictable and recurring revenue that a SaaS company generates from its customers each month. Understanding the MRR Growth Rate helps a SaaS company track its revenue expansion, customer acquisition, retention, and overall business health.
Data required:
- MRR at the start of the month
- MRR at the end of the month
- MRR from new customers acquired during the month
- MRR lost from churned customers
- MRR expansion from existing customers (e.g., upgrades or cross-sells)
- MRR contraction from existing customers (e.g., downgrades)
Detailed step-by-step instruction on how to conduct the analysis:
- Determine the MRR at the start and end of the month:
- Starting MRR: The MRR at the beginning of the month, including recurring subscription fees from all customers.
- Ending MRR: The MRR at the end of the month, after factoring in new customers, churned customers, upgrades, and downgrades.
- Calculate MRR from new customers:
Identify the MRR added during the month from newly acquired customers. This value should only include revenue from customers who signed up within the month. - Calculate MRR lost from churned customers:
Identify the MRR lost from customers who canceled their subscriptions (churn) during the month. This value reflects the negative impact on recurring revenue. - Calculate MRR expansion:
Identify the MRR gained from existing customers who upgraded their subscriptions, purchased additional services, or expanded their usage within the month. - Calculate MRR contraction:
Identify the MRR lost from existing customers who downgraded their subscriptions, reducing the amount they are paying monthly. - Calculate the Net MRR Growth Rate:
Use the following formula to calculate the Net MRR Growth Rate:
MRR Growth Rate (%) = [(Ending MRR – Starting MRR) / Starting MRR] x 100
For example, if your MRR at the start of the month was $100,000, and by the end of the month, your MRR increased to $110,000, your growth rate would be:
MRR Growth Rate (%) = [($110,000 – $100,000) / $100,000] x 100 = 10%
Format of the output of analysis:
The output is typically expressed as a percentage increase (or decrease) in MRR from one month to the next. In the example above, the output would be:
Monthly Recurring Revenue Growth Rate: 10%
How to interpret results:
- Positive MRR Growth Rate: A positive MRR Growth Rate indicates that the company is acquiring new customers or expanding revenue from existing customers faster than it is losing revenue through churn or downgrades. A strong growth rate is a healthy indicator of business expansion.
- Negative MRR Growth Rate: A negative MRR Growth Rate suggests that the company is losing revenue, either through churn, downgrades, or insufficient customer acquisition. This could signal issues in customer retention, product-market fit, or ineffective sales efforts.
The MRR Growth Rate is a leading indicator of the company’s overall financial health, as it reflects the steady, predictable revenue stream that fuels the business’s growth.
Steps a company can take to improve on this measure:
- Increase customer acquisition efforts:
Boost marketing and sales initiatives to acquire more new customers, which will directly increase MRR. Focus on targeted campaigns that attract higher-value customers. - Improve customer retention:
Reduce churn by improving customer support, product quality, and customer success strategies. Engaging customers early and frequently helps ensure satisfaction and reduces the likelihood of cancellations. - Encourage upsells and cross-sells:
Drive MRR expansion by offering additional products or features to existing customers. Implementing a well-designed upgrade path or encouraging customers to move to higher-tier plans can increase MRR. - Reduce customer downgrades:
Analyze why customers are downgrading and address underlying issues, such as product complexity or price sensitivity. Offering flexible pricing plans or product configurations may reduce contraction. - Monitor customer feedback:
Regularly collect feedback from customers to understand their pain points and opportunities for improving the product. A better product can increase customer satisfaction and drive upsells.
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