This is a metric that summarizes the business’ recurring revenue normalized into a monthly amount. The primary purpose of MRR is to allow for performance reporting across dissimilar subscription terms and to remove the noise typically found in GAAP calculations. It is a very common measure of financial performance across SaaS businesses and seems to track the underlying health of the business quite well.

The overall MRR is commonly categorized into the following classes:

• New
• Renewal
• Expansion / Upgrade
• Contraction / Downgrade
• Lost / Churn

How is MRR Calculated?

MRR is calculated by generating an effective monthly revenue for every subscription. If the subscription is active at any point in a given month, the monthly revenue is attributed to that month. Note that subscription only has to be active during the month; it does not matter how long the subscription was active for in the month.

• New
  Revenue associated with brand new subscriptions starting in the month.
• Renewal
  Revenue associated with continuing subscriptions in the month (i.e. these subscriptions were active in the prior month)
• Expansion / Upgrade
  The incremental revenue associated with upgrades
• Contraction / Downgrade
  The incremental revenue lost associated with downgrades
• Lost / Churn
  Revenue lost associated with subscriptions that did not renew (compared to the prior month active subscriptions)

Why care about this Metric?

There are many moving parts to any business. New customer acquisition, retention programs, price promotions, service promotions, etc., all of which influences the core business in their own way. MRR provides a means of normalizing the effects of all the various business movements to answer one simple question: overall today, is the business growing, shrinking, or staying flat? Regardless of most business programs, MRR’s simple definition provides a very clear bell weather as to the overall growth (or decline) of a company.

MRR is directly related to the number of active subscriptions and the respective value of each subscription. Growth can only occur through the addition of new subscriptions or through existing customer upgrades. Declines occur through the churn or downgrades. The effect of certain retention programs such as early renewal can sometimes mask the underlying health of the business. However, such programs don’t have a direct impact on the current MRR as it does not affect the current value of the subscription. The impact of such a program would be realized in future MRR values when the renewed contract is actually in force.