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Tracking Momentum in SaaS – The MRR Calculation

August 7, 2018

 

 

 

Subscription based businesses heavily depend on a steady revenue stream as the cornerstone of their business model.  Monthly Recurring Revenue, commonly known as MRR, is the key metric in SaaS that measures growth or decline.  It is the indicator of momentum, both upward and downward trending.

 

MRR is not part of GAAP (Generally Accepted Accounting Principles), IFRS (International Financial Reporting Standards), or reported to a government entity, not having these numbers correctly calculated means you’re lying to investors or worse - you’re setting yourself up for a potential rude awakening when you’ve realized you've misjudged and misplanned your momentum. 

 

In order to calculate your MRR, sum up the per month revenue, taking into consideration multi-month subscriptions and dividing the total contract value by the number of months in a contract.  Your number should be the value of the subscription on a per month basis.  You may find you want to break this top level information down a bit further, segmenting by plan type of other stats important to you. 

 

While this all-important metric may seem quite simple to calculate and track, there are a few common mistakes that are made which will shift your metric, and decisions made upon them, if you are not careful.

 

  1. Including quarterly, semi-annual, or annual contracts at full value in a single month.  Remember that MRR is a momentum metric, not a cash flow measurement.  You are trying to measure how quickly and efficiently you are growing.  Adding full value of a multi-month contract inflates that number.

  2. Subtracting transaction fees from the monthly subscription.  While backing out a transaction fee may be more conservative, you are also masking room for optimization and not giving yourself credit for the full amount of the subscription.

  3. Not including discounts.  If you offered your customer a discount, then they have paid less and your MRR should be reduced also.  It is less revenue per month.  If you do not back out discounts, you are inflating your numbers.

 

Making any one of these mistakes may not have a huge impact on your decision making.  However, the cumulative effect of more than one calculation error may be more misleading.  Finally, be sure you fully understand what is and is not in your MRR calculation so you can respond and answer any questions to investors or board members accurately.

 

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