Key Performance Indicator of Monthly Recurring Revenue in Startups

Key Performance Indicator of Monthly Recurring Revenue
Performance Analysis

If you were supposed to review your business achievements in a meeting, which key performance indicators would you use? Which of the following best describes how successful your business is? Note that using a large number of key performance indicators can backfire, so it is best to use the indicators conveying more information. One of the most important key performance indicators that helps in businesses analysis is the key performance indicator of Monthly Recurring Revenue (MRR). In this article, we have examined this indicator and its calculation. 

How to Choose Key Performance Indicators for Our Business?

What is the key performance indicator of Monthly Recurring Revenue (MRR) ?

The key performance indicator of Monthly Recurring Revenue tells you how much revenue your business has generated each month. Simply put, Monthly Recurring Revenue is a way of predicting your business’s expected monthly revenue. Not only does this indicator help you track revenue trends over time, but you can also compare it to your Monthly Registration Rate, Monthly Growth Rate, and Customer Retention Rate. Analyzing Monthly Recurring Revenue shows you that your business revenue trend is increasing or decreasing. This indicator helps the sales team to make the right decisions and take proper actions to increase revenue if necessary. 

How is it calculated?

Before considering the formula for calculating the KPI of Monthly Recurring Revenue, let’s review the following concepts. 

Revenue: The revenue that your business earns in exchange for selling its products and services. 

Recurring revenue: This is the revenue that you can earn on a regular basis. This recurring revenue can be measured as Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR). 

Imagine you own a photo storage startup, your customers have to pay a monthly fee to subscribe to your service every year. If your customers pay $ 1,200 a year, then your regular monthly income will be $ 100. According to the example given, Monthly Recurring Revenue is obtained from the following equation. 

Monthly Recurring Revenue = Total number of accounts in that month * Average Revenue Per Account  

As can be seen from the above equation, Average Revenue Per Account is an important metrics in calculating Monthly Recurring Revenue (MRR). In previous articles, it was stated that to calculate Average Revenue Per Account (ARPA), the amount paid by all customers should be divided by the number of customers in that month, and then to calculate Monthly Recurring Revenue, the number should be multiplied by the total number of customers. For example, if 100 customers pay an average of $ 50 per month, the recurring monthly revenue index for these customers would be $ 5,000. 

MRR Equation (1)

In addition to the mentioned method, there are other methods that you can use to calculate Monthly Recurring Revenue. The methods you would go for are highly dependent on your business. 

Types of Monthly Recurring Revenue

  1. New MRR: This is Monthly Recurring Revenue generated from new customers. For example, if you have 10 new customers in a month, half of whom pay $ 50 and the other half pay $ 100 a month, the New Monthly New MRR will be $ 750. 
  1. Expansion MRR: This type of Monthly Recurring Revenue represents the additional recurring monthly revenue of your current customers. For instance, suppose that 4 customers in the previous example increase their contracts from $ 50 to $ 100 per month, then the Expansion MRR would be $ 200. 
  1. Churn MRR: Obviously, this indicator shows the revenue that the business loses due to customer churn. For instance, suppose that one customer in the previous example cancels his $ 50 subscription, and three customers reduce their monthly subscription from $ 100 to $ 50 per month, then Churn MRR would be $ 200. 
  1. Net New MRR: This type of Monthly Recurring Revenue is calculated using the three types aforementioned MRRs according to the following equation. The result of the following relationship indicates how much Monthly Recurring Revenue you have earned or lost. 

Net New MRR = New MRR + Expansion MRR – Churned MRR 

If Churned MRR > New MRR + Expansion MRR, the business has lost revenue. 

 But if Churned MRR < New MRR + Expansion MRRthe business has had a positive revenue. 

In general, Monthly Recurring Revenue is one of the most important financial KPIs. Although there are other important metrics such as Growth Rate, Rate of Return, and Average Selling Price, Monthly Recurring Revenue is a key criterion for investigating the sales team’s performance. 

What are the key performance indicators associated with Monthly Recurring Revenue? 

The Key Performance Indicator of Monthly Recurring Revenue not only helps business owners monitor revenue generation trends over time, but as mentioned earlier, other indicators such as Monthly Registration Rate, Monthly Growth Rate, and Customer Retention Rate can be used together with this indicator to analyze the business and compare it with others more accurately. 

It should be noted that the selection of key performance indicators for a business is influenced by the maturity level of the business, the market in which it operates, the competitive environment and many other factors that require sufficient knowledge and experience. Retiba’s experts are ready to carefully evaluate your startup business model, select key performance indicators, and analyze your business performance. All you have to do is enter your information in the evaluation application form and wait for Retiba’s experts to contact you. 

What stage is your startup at? Value your startup online with Retiba’s software free of charge.

Your startup has crossed Death Valley, and it has had at least 2 funding rounds? Discounted Cash Flows​ (DCF)

Your startup has had at least one funding round, you are advised to use Multiples method for valuation.

Your startup is at pre-seed and seed funding rounds, you are advised to use the Score Cards Method, Risk Factors Summation method to value your startup.

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