If you’re a SaaS company, then you know that MRR is key. But how do you calculate it? This blog post will show you the difference between bookings and MRR, and give you the SaaS formula for calculating your company’s monthly recurring revenue.
I remember when I was first starting out in the world of SaaS. I had no idea what SaaS Formula was, let alone how to calculate it. It wasn’t until I took a course on startup finance that I finally understood the importance of this metric.
And now, I want to share that knowledge with you so that can avoid any confusion when calculating your own company’s MRR.
SaaS Formula: The Metrics for Churn (Renewals)
The following shows the metrics to understand Churn:
1. The SaaS Quick Ratio
The “quick” in “SaaS Quick Ratio” refers to the amount of time it takes a company to collect cash from customers. This, however, is a double-edged sword, as this can also mean the “underbelly” of a business, as in how quickly it can collect money from its customers.
Any metrics that give you insight to reducing customer turnover are going to be important, and the Quick Ratio for Saas businesses does just that.
The Quick Ratio formula is: (Monthly Recurring Revenue + (New 12) + (Expansion 12)) (Average Accounts Receivable).
Or, if you’d rather, you can replace these 2 numbers with their ARR counterparts.
To calculate the SaaS Quick Ratio, you need to take your New MRR and divide it by the Expansion MRR. This ratio is important because it will give you an indication of how quickly your business is growing.
If the Quick Ratio is high, then it means that you are acquiring new customers at a faster rate than you are losing them.
The sum of the Downgrades and Churns is then divided in half, and the resulting number is then multiplied by 100.
The quick ratio is calculated by taking the sum of your upgrade and expansion revenue and dividing it by the total of your downgrade and churn. The ratio is a good indicator of the health of your company as it shows how you are growing your revenue from existing customers.
The ratio of your New and Expansion revenue to your Downgrades and Churn is your Quick Ratio.
Here is an example of how it works with a fictional software company.
Company A had $30,000 in net new revenue from their subscription services, but $50,000 in total revenue. They also had $16,000 in lost revenue from customer cancellations and $2,875 in losses from customers downgrading their service. This gave them a 4.2x ratio.
This company has a quick ratio of 4.2.
Now that we know our ratio number, we need to understand what this means. Is it a positive or negative number?
2. Monthly Recurring Revenue (MRR)
Most subscription-based companies operate on a monthly recurring basis: Customers pay a fee every month for as long as they are a customer. This consistent revenue stream is known as monthly recurring revenue (MRR).
The ease of tracking this revenue, and forecasting it, is (in part) due to the consistent nature of the payments.
Understanding monthly recurring revenues, or MRE, allows us to make better business decisions and forecasts.
If we know our acquisition and retention numbers, we can project what our future revenue will look like. This helps us allocate resources effectively to maximize our growth potential.
For subscription businesses, like software as a service companies, MRR is one of the most critical metrics. But it can be difficult to determine, track, and project yours.
How to determine your MRR
To calculate your Monthly Recurring Revenue, add up the revenue generated that month.
MRRt =Σ Recurring Revenues
3. Annual Recurring Revenue (ARR)
Recurring Revenue is the amount of income that a business generates from its customers after they’ve paid their subscription or membership fees.
For Forecasting purposes, Annual Recurring Revenue (or ARR) is the amount of money you expect to make from your customers every year.
ARR = MRR * 12
If you’re confused about the differences between ARR and MRR. Don’t worry, AAR is typically only used by enterprise companies, who usually deal with annual contracts.
If the majority of your revenue stream comes from monthly subscribers, then you’ll be better off with MRR, which tracks the lifetime value of your customers.
“…most enterprise SaaS companies should use annual recurring revenue (ARR), not monthly recurring revenue (MRR), because most enterprise companies are doing annual, not monthly, contracts…”Dave Kellog
What to include in MRR calculation:
All monthly charges, from basic subscriptions to extra users and seat licenses, should be included in your calculation of your Monthly Recurring Revenue (MRR).
You’ll also want to keep track of upgrades, downgrades and any lost revenue from customer cancellations. Discounts should also be factored into the MRR of your customers – if your customer is on a $200 per month plan, but their monthly bill is $150, their contribution to your ARR is $150, not $200.
What to exclude:
Recurring costs should be excluded from MRR because they don’t measure profitability, just revenue. Bookings should also be excluded because they can confuse matters.
SaaS Formula: The Difference Between MRR and Bookings.
If you have customers who pay on a monthly basis, calculating the MRR is straightforward. But what if some of your clients want to pay for a whole year in advance?
In the following example, we have three clients who each pay for a different length of time. 2 of the clients are on monthly subscriptions, while 1 client pays yearly.
If we treated the advanced payment as monthly recurring revenue, our reports might look like this:
January: 200 + 200 + 2400 = $2800 MRR February: 200 + 200 + 0 = $400 MRR March: 200 + 200 + 0 = $400 MRR …
Since that annual fee isn’t paid for on a monthly basis, it shouldn’t be counted as MRR.
The value you get from a new deal should be counted as a part of your Booking number. The bookings number is the total of all the new deals you make over a specific period of time, regardless of their upfront or ongoing nature. To turn a booking into an MRR, you need to spread the payment out over 12 months.
Your Bookings are a great tool for calculating your cash flows, but in order to get a more accurate picture of your annual revenue, you should spread them out over each month.
January: 200 + 200 + (2400/12) = $600 MRR February: 200 + 200 + (2400/12) = $600 MRR March: 200 + 200 + (2400/12) = $600 MRR …
If you’re getting both monthly subscriptions and annual ones, this can make it tough to clearly track your monthly recurring revenue.
Even the simplest of distinctions, like booking vs. MRR, can cause issues for even the most established and successful companies.
Conclusion
When it comes to calculating your SaaS company’s MRR, the most crucial thing to remember is the difference between bookings and MRR. Bookings are one-time or upfront payments, while MRR is recurring revenue that is billed monthly.
To calculate your company’s MRR, simply take your total monthly recurring revenue and divide it by the number of customers you have. And that’s all there is to it!
Just remember to use this SaaS formula every month so that you can track your company’s growth accurately.
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