Monthly Recurring Revenue: what is it & how to calculate it

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Sasha Hodes
Monthly Recurring Revenue: what is it & how to calculate it

Table of Content:

  1. What is Monthly Recurring Revenue?
  2. Why is MRR so important?
    • 1. Planning ahead
    • 2. Tracking progress
    • 3. Budgeting wisely
  3. How do you calculate Monthly Recurring Revenue?
  4. Types of MRR
    • New MR
    • Expansion MRR
    • Churn MRR
    • Net New MRR
  5. MRR for Mobile Apps
  6. Strategies, tips, and pitfalls to improving MRR
    • Calculate everything correctly
    • Setting MRR goals
    • Consider re-pricing your app
    • Upsell the app
    • Ditch your free plan
    • Don’t include app revenue at full value each month
    • Don’t subtract additional fees or charges
    • Don’t include one-time payments

To be truly successful, your mobile app business requires reliable revenue that’s visible month after month. Some platforms - like social networking apps - work using viral engines of growth, while others rely on paid or sticky engines of growth — such as subscription-based and m-commerce applications.

The metric that’s consistent across them all is Monthly Recurring Revenue. Investors look at MMR when considering your app’s growth potential and success to date. It's also a key internal metric that illustrates your overall company performance. From this, you can realistically plan & finance future initiatives, as well more accurately forecast your company’s direction of growth.

What is Monthly Recurring Revenue?

Monthly Recurring Revenue (MRR) is the predicted amount of revenue that your mobile app business can expect to earn each month. From knowing exactly how much income you're generating every month, you can record and review hard numbers and revenue trends over time. You can then begin to compare MRR to data like the monthly sign up rate for the subscription service offered, plus monthly growth and customer retention rates.

So that’s the succinct overview of what MRR is exactly, but why should you take note of it? And what importance does it have to your mobile app business today?

Why is MRR so important?

Well, successful mobile app companies track MRR for a few main reasons. Let’s take a look:

1. Planning ahead

    A significant part of the app business model and its ability to make very accurate financial projections, is having somewhat consistent - and predictable - MRR. Therefore, the more consistent your monthly revenue is, the more reliable your assessment of where your business will be shortly. MRR allows you to plan with confidence in the data you’re gathering.

    2. Tracking progress

      No matter the size of your mobile app business, the growth in your MRR month-by-month is of paramount importance. You want a clear indication of how your app is progressing before you take your next steps. There are many ways you can improve your MRR if the data is looking less favourable than you’d like, or you may already be on an unstoppable upward trajectory — in which case, great news! Either way, the key takeaway here is making sure you have a clear sight of where your company is likely to be a few months from now.

      3. Budgeting wisely

        As a mobile app owner, you want to be in the strongest position to support your product’s growth. That often means knowing where best to use your budget — and how to keep to it! Whether you’re having to tighten the pursestrings slightly, or you want to boost your marketing efforts, your MRR will help you to make the most informed decisions possible.

        MRR gives you an accurate estimate of the revenue potential of your application, which you can use to help you decide how best to progress and grow your business.

        How do you calculate Monthly Recurring Revenue?

        Sounding useful to you? It should do! MRR has proven worthwhile for numerous mobile-centric businesses in their pursuit of sustained app growth, attracting new customers, building brand momentum, and ultimately generating more purchases from downloads of your app. Knowing how to calculate it could prove to be a game-changing addition to your arsenal — let’s get into it.

        So, the Average Revenue Per Account (ARPA) is the important metric to consider when working out your MRR. ARPA is the average amount of money your business has received from each of your customers in a given month. To calculate that figure, you take the average amount each of your customers is paying, then divide that number by the total number of customers that month.

        Still with us? Good. Now, to determine your MRR, you multiply that figure by your total number of customers. Let's say you’ve launched a brand new app and you have 200 customers all paying a subscription fee of $10 per month to use it. That means your MRR would be $2,000.

        Here are the key calculations you need to be able to perform sequentially:

        • Calculate the total revenue from all customers in the month
        • Work out the average monthly amount paid by all customers
        • Multiply that average by the total number of customers

        There you have it. And for the mathematicians, we can also break this down into an easily understandable formula:

        How to calculate monthly recurring revenue
        MRR formula

        Types of MRR

        With the calculations now covered, we can start to look at the different types of MRR. Mobile app owners will want to know which sales metrics reflect the largest business impact and if there are certain ones they should prioritize.

        Breaking MRR down even further will help you look at revenue growth and trends to see if there are any specific areas you could improve upon.

        New MR

        The metric that measures monthly recurring revenue generated from brand new customers only.

        Expansion MRR

        Represents any extra monthly recurring revenue you’ve acquired from your existing customers.

        Churn MRR

        Any revenue lost as a result of customers cancelling or downgrading a subscription.

        Net New MRR

        This is an average amount calculated via the above three MRR types which tells you the MRR you're either gaining or losing — depending on if the sum of the net new MRR and expansion MRR is greater or less than the churn MRR:

        How to calculate Net New Monthly Recurring Revenue
        Net New MRR formula

          MRR for Mobile Apps

          It’s difficult to know which metrics are the most important ones to be tracking with regards to improving app performance and increasing customer retention. All of these different strands of MRR are useful but particularly prominent for subscription-based businesses, but are particularly useful for calculating the right metrics with regards to mobile applications and mobile business growth.

          It is MRR that forms the most effective measurement of progress for businesses of this type, as most mobile app offerings lean heavily on MRR as well as other metrics like Lifetime Value (LTV), Retention Rate, and User Acquisition (UA) Rate to ensure they are performing optimally and consistently driving revenue.

          Strategies, tips, and pitfalls to improving MRR 

          There is no easy way to improve your MRR, but there are some strategies that other mobile app businesses have benefited from. Implementing them could be hugely significant for your app too:

          There is no easy way to improve your MRR, but there are some strategies that other mobile app businesses have benefited from. Implementing them could be hugely significant for your app too:

          Calculate everything correctly

          Human error exists in every business — even global corporations. Therefore, making sure the numbers are accurate is key. It may seem like an obvious point, but the figures you’re calculating are the same ones you’re going to be relying on to budget and invest in your mobile app business.

          Setting MRR goals

          One thing to remember is that MRR is a metric for momentum, so track your progress in small steps. For example, set goals for your app’s MRR growth rate from last month, for the current month, and your overall MRR growth rate for the current month. Consistent analysis of your MRR can reap rewards in the form of a larger customer base or larger opportunities to reduce churn or increase sales.

          There are other tips on MRR best practices that you can also follow:

          Consider re-pricing your app

          It’s important to know your worth. If you’ve seen previous sustained app growth plateauing, consider increasing the price of your product. If you’re no longer seeing a positive impact from the price increase, stick with it and test another price increase at a future date.

          Upsell the app

          Your loyal customer base already has trust in your app business, so see this as an opportunity to offer them an upgrade. If they are getting good value currently, then there is a strong likelihood of a large uptake in other app features you offer them.

          Ditch your free plan

          A free trial is an effective tool for giving potential subscribers a glimpse of your app offering. However, they can deter people away if they do not see the full value of paying for or subscribing to your product’ service. Offering a limited-time trial with the full benefits of your app is more likely to persuade your audience to take up a full subscription, for example.

          There are also a few things to avoid to make sure that you’re calculating your figures correctly and your app receives the maximum possible benefits from MRR:

          Don’t include app revenue at full value each month

          Remember that the purpose of MRR is to analyse momentum, over-recording cash flow. If you include all revenue as lump sums then you’re throwing off other metrics which will ultimately give you inaccurate readings of your mobile app business growth.

          Don’t subtract additional fees or charges

          It may seem like best practice to remove transaction fees or delinquent charges from your revenue totals, but it can actually have a detrimental effect on your metrics if you do so.

          Delinquent charges should be separated into their own category which will allow you to accurately measure and decrease the amount of lost revenue each month due to failed or expired credit cards. Additionally, including transaction fees can be labelled as expenses rather than being taken out of your overall MRR.

          Don’t include one-time payments

          Given that one-time payments are exactly that - not recurring payments - it's unnecessary to include them in your app’s MRR calculations. Doing so will likely inflate your revenue expectations and skew your financial model.

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