Have you ever counted how many SaaS metrics are out there? 5, 10 or more?
Some of them focus on revenue, others on expenses and they are mainly interrelated. MRR and ARR are the metrics that point out the revenue generated on a monthly and annual basis respectively.
In our post, we are going to discuss why monthly recurring revenue is a must-know metric, how to increase it and what’s the reasonable MoM (month on month) growth rate for your SaaS company.
Before getting started, let’s make sure we are on the same page and let’s understand what’s MRR.
Monthly Recurring Revenue (MRR) is the total amount of money your SaaS company expects from active subscribers on a monthly basis. It’s one of the most essential SaaS metrics your company should ever care about. Let’s understand the main terms here.
Total amount of money – your gross revenue (including taxes, salaries, and other expenses)
Active subscribers – users who have chosen one of your paid subscription plans (you may have 2 or more products and one product may have 2 or more pricing plans)
Monthly basis – monthly and annual payments are the most common ways to charge your customers. If you have annual plans too, you’d better calculate your ARR (Annual Recurring Revenue) separately.
Monthly subscription complements annual subscription – there are 2 the most popular systems that SaaS companies offer to their prospects. Now let’s discover what are the strengths and weaknesses of monthly payments.
#1 It becomes much easier for your sales team to close sales and acquire paying customers as a monthly subscription fee is usually a small amount.
#2 You have the opportunity to target a larger number of businesses as startups and companies with low budgets are more likely to go for monthly, rather than annual subscriptions.
#3 You don’t make an additional discount as you’d do in case of annual billing.
#1 You have to invest double efforts to retain your customers. Those efforts include active communication, tracking and analyzing their behavior while using your software. Customer churn prediction tools usually require expenses too.
#2 Sometimes a customer will walk away before you win back the costs you invested to acquire him/her (your CAC is higher than customer LTV).
#3 SaaS companies lose customers because of failed payments too and that’s a pity.
Imagine that a customer fails to make a payment because of credit card expirations or rejected attempts.
What happens next? You contact them so they refer to their bank, update their credit card, and complete the payment. Note to mention about the invoicing process that again requires human resources and time.
In essence, a month is the most reasonable period for measuring your SaaS growth, yet a week is too short and a year is too long if you need to check your SaaS company’s achievements on a regular basis.
After analyzing your SaaS company’s monthly performance, you will have an opportunity to understand how much revenue exactly to anticipate the next month or what changes to initiate in your sales efforts that will affect your MRR in a positive way.
When you calculate your SaaS MRR, you arm yourself with
– predictability – you know how much cash to expect next month
– flexibility – you know how much money you can afford to spend
– accuracy – you know all the data you have is based on real data
Here’s the basic formula: MRR = (# of customers*pricing plan 1 fee) + (# of customers*pricing plan 2 fee) + # of customers*pricing plan 3 fee). You should include subscription fees 4, 5, 6 if you have that many pricing options.
Let’s see how you’d calculate MRR in different situations.
1 product with 1 pricing plan: you multiply the number of customers by the amount of the subscription fee.
For example, you charge a flat rate from your customers (like Basecamp whose monthly fee is $99). If you have 65 paying customers and your flat rate is $50 per month, your MRR is $3250.
1 or more products with multiple pricing plans: you multiply the number of customers by the average amount of money that is paid every month.
Let’s say, you have just one SaaS product with 2 pricing plans. If you have 10 customers who are paying $35 for the first plan and 7 customers who are adding $70 to your treasury, then here’s the shortest path of what to do next:
In this case, the average for 35 and 70 is $52.5.
52.5*17 (number of customers)=$892.5
Another way that is more accurate but a bit more complex to calculate is the following:
10*35=350 (from the first group of customers)
7*70=70 (from the second group of customers)
350+70=$420 (your accurate MRR)
Actually, you need to know only the most essential ones.
New MRR – based on how much money you acquired from new subscribers
Expansion MRR – based on how many of your customers upgraded their subscription plans
Churn MRR – based on how many of your customers left you (yes, unfortunately, no one is free from this and when you have customer churn, you have MRR churn)
And one more important thing! Discounts and downgrades also need to be taken into account as they directly affect your revenue. If you make discounts or a customer downgrades his/her plan, your average product price and MRR change accordingly.
Finally, you’d like to know how much your net MRR (net monthly profit) is. The formula is MRR-CAC (Customer Acquisition Cost)=your net MRR.
It’s the same as asking how much churn rate is reasonable. Of course, an approximate and general answer exists but you shouldn’t disregard factors like
1. Competition in your niche – Are you in a highly competitive niche full of “big fishes” or your software is designed for a specific solution and has only a few competitors?
For example, if your software is a CRM (Customer Relationship Management) tool, you maybe know that Salesforce and HubSpot are the main leaders in this niche.
But if your software is, for example, customer engagement software it’s hard to mention obvious leaders who have conquered the largest market share.
2. Maturity of your business – Junior companies tend to grow faster than senior companies. In your company’s growth stage, you should provide a constant increase for your business so that in the maturity stage you are confident about your customer base and cash flow.
You should establish that solid and strong foundation for your startup to enjoy stability and avoid failure in your future business activities.
3. Your profit and loss (P&L) – If you don’t pursue ambitious goals and even modest growth is growth for you, then have a look at your cost/benefit ratio.
If you are Ok with your current team size, want to continue with the same number of customers and your current monthly profit exceeds your current expenses (including salaries, marketing, and software maintenance budget), then your current MRR probably is just enough for you.
And whatever your MRR growth rate is, you don’t have to match it with what others recommend you.
But think twice. Isn’t there a possibility that your current customers will prefer your competitor over your company or your CAC (customer acquisition cost) will reach a higher amount?
If something goes wrong and you don’t have enough resources to handle the situation, your losses will exceed your profit.
Now let’s move to the essence of the topic. What’s the minimum MoM growth rate you should strive to ensure? Well, the short answer is: if you ensure a two-digit number – that is 10% MoM growth – already sounds good and you are going in the right direction.
Jason Lemkin, an expert on SaaS-related topics, writes that you can reach $1m ARR in 6 months or 4 years – that’s not a disaster. And growing 12-15% per month is enough even when you reach $1m ARR.
To sum up, MoM growth that is equal to or higher than 20% is something happening rarely, being typical for a small number of businesses.
15% MoM growth is something great and you need a great product to achieve that number.
10% is your minimum target if you want your business to move forward rather than stay in the same place.
MRR SaaS metric has the potential to grow… a lot. Here’s how!
#1 Grow your leads extensively and convert them with strategy
You can work on generating more leads and closing more sales with your existing subscription plans. It means you simply work harder and smarter on your
SaaS lead generation efforts and keep your prices untouched.
Don’t focus on the number of people who will download a single eBook or cheat sheet and walk away. Urge them to subscribe to your newsletter too.
Create an email flow for each resource that is downloaded, educate them about your product, and eventually offer them to sign up for a free trial or contact your team.
#2 Monitor, score and analyze customer engagement to predict churn
You develop a customer retention strategy that will allow you to create additional incentives for your customers to continue using your services and help you reduce the churn rate.
Have you heard of the customer engagement score? Here is how it’s done. You determine the activities that are typical for engaged customers and activities that point out to churn. You can give 1 point to a “churn-oriented” step and 10 points to the positive step your customers take.
After all, when a customer’s engagement score is below, for example, 70, they need special attention and support.
InnerTrends is one of the similar tools. The software shows how many users have high, medium, low and very low engagement, how many points X group of customers has gained and how much percent is the churn risk for X group of customers.
#3 Incentivize your customers to recommend you to colleagues and friends
You can develop a customer referral program and encourage your customers to tell their interested friends about your company. As a result, you offer a symbolic remuneration (1-month free, discount or access to training) both to your customer and his/her friend who became your paying customer.
For example, DropBox was offering 16 GB free space if a user invited his/her friend to DropBox or PayPal was paying $20 to every customer once they recommended PayPal to another contact. If you want to get acquainted with more examples, you can check out our article 5 Examples of Excellent SaaS Customer Referral Programs.
#4 Grow your revenue intensively with upselling strategy
You can offer more features to your existing client base. We talk about upselling.
Upselling: you offer your customers to upgrade their subscription plan and consequently pay more. In this case, you should remind your customers about the additional value they will receive from your higher plan.
#5 Raise your prices (carefully)
This is another option for increasing your revenue but you should care about some details. When you raise your price, it’s supposed that you add more features to your software or improve existing ones.
Because your customers will probably feel disappointed with your pricing strategy once you demand more and don’t provide anything extra.
Do you offer both monthly and annual billing options to your customers? How much is your MoM growth? We hope our post was useful and you will apply constructive changes to your overall revenue growth strategy.