What is MRR? Explanation of reasons and improvement measures to be emphasized in SaaS business

There are various types of MRR, and the MRR you should pay attention to varies greatly depending on the business phase.

If you can’t grasp the current state of MRR and propose improvement measures that are in line with your business, you will not be able to obtain budgets from managers and investors.

In this article, we will explain the background to why MRR has attracted attention, investors’ perspectives on MRR, and explain measures to improve MRR, which influences the growth of SaaS businesses.

Table of contents

MRR (Monthly Recurring Revenue) is expressed as “monthly recurring revenue” in Japanese. Simply put, it refers to “sales that occur every month” and is distinguished from sales that occur only in that month.

Sales that occur each month will remain the same as the previous month if there are no changes in the situation. On the other hand, if MRR increases from the previous month, it can be judged that the business is expected to grow.

Usage scene of MRR

Since MRR refers to sales that always occur every month, it is an indicator that is used in such businesses, that is, SaaS businesses that develop subscription-type products and services.

Subscription-type services include unlimited listening to music, use of online storage, monthly fees for fan clubs, and regular purchase services for ingredients.

On the other hand, it is not an important indicator for website creation, physical store management, etc., which do not generate subscription-type income.

MRR is an index that attracts attention from investors

It is not hard to imagine that MRR is an index that is easy to follow as a target in the SaaS business, but it is also an index that attracts attention from outside such as investors.

When evaluating a SaaS business, investors focus on three points: growth potential, efficiency, and continuity.

In particular, MRR clearly shows the growth potential of the business, so companies need to make efforts to produce good MRR figures in order to get investment in the business.

In the SaaS business, some customers sign new contracts every month, while others cancel. There are the following four words that express this increase or decrease, and they are indispensable for KPI design.

• New MRR
• Expansion MRR
• Downgrade MRR
• Churn MRR

The top two out of four (New MRR/Expansion MRR) are MRR that have increased from the previous month.

On the other hand, the remaining bottom two (Downgrade MRR/Churn MRR) refer to MRR that “decreased from the previous month.”

The MRR for the current month is calculated by adding the increase from the previous month’s MRR and subtracting the decrease.

New MRR

“Newly increased” sales, such as new subscriptions to subscription-type services, are New MRR.

New MRR will occupy a large proportion immediately after the service launch.

Expansion MRR

If you have multiple tiered plans for your subscription-based service, sales will increase if you have customers who change from a lower plan to a higher one.

This part is called Expansion MRR.

Downgrade MRR

Contrary to Expansion MRR, Downgrade MRR is the decrease in sales due to the change from the upper plan to the lower plan.

Churn MRR

Contrary to New MRR, Churn MRR refers to the decrease in sales due to service cancellations.

Churn MRR should be as low as possible.

Calculating MRR is not difficult at all.

Basic calculation method

MRR can be calculated by multiplying the number of contracts by the monthly payment amount.

For example, if there are 100 subscribers for the 5,000 yen monthly plan and 10 subscribers for the 1,000 yen monthly plan, the MRR for that month is

5,000 x 100 + 1,000 x 10 = 600,000

becomes.

You can calculate the next month and the month after that in the same way, but by considering the four MRRs introduced earlier, you will be able to see how things have changed. The calculation formula is as follows.

1. This month’s MRR = Previous month’s MRR + New MRR + Expansion MRR – Downgrade MRR – Churn MRR

By calculating in consideration of four increases and decreases in this way, you will be able to understand why MRR increased or decreased.

Notes on MRR calculation – Amount to include, Amount not to include

When calculating MRR, it is difficult to decide whether or not to include it in monthly sales. Please refer to the following.

If a subscription-type service has a free period, that period is not included in MRR even if the customer actually uses it. Similarly, if you are offering a discount for a limited time only, we will record the amount actually incurred.

If payment from a customer is delayed, it is “included in MRR” if there is actual usage and a claim has occurred.

Sales generated outside of subscription-type services even for the same customer, such as initial costs, consulting costs, and options paid additionally only for that month, are not included in MRR.

A word similar to MRR is “ARR”. ARR (Annual Recurring Revenue) is a term that means “annual recurring revenue” and refers to sales that occur every year.

In BtoB SaaS business, annual plans with discounts are often selected, and in such cases ARR is calculated and used as a management strategy indicator.

If there is a difference in fees for the same service content, MRR and ARR must be calculated separately, but ARR can be calculated by simply multiplying MRR by 12.

In this way, if there are sales with different billing periods, it is possible to calculate the MRR or ARR of the entire business by calculating according to one period.

As a matter of course, investors prefer businesses with large “New MRR” and “Expansion MRR” and small “Downgrade MRR” and “Churn MRR” when making investment decisions.

Among them, the index that attracts the most attention in the SaaS business from the middle stage onwards is the “SaaS Quick Ratio,” which summarizes the four indexes.

SaaS Quick Ratio is calculated as follows:

1. SaaS Quick Ratio (%) = (New MRR + Expansion MRR) ÷ (Churn MRR + Downgrade MRR)

As you can see from the formula, SaaS Quick Ratio means the ratio of increase and decrease. If the increase in sales equals the decrease in sales, the SaaS Quick Ratio is “1”.

SaaS Quick Ratio can be used to gauge whether customer loyalty is secured, but in the early stages of business, New MRR tends to be high and Churn MRR low, so SaaS Quick Ratio is not very important. .

Churn MRR and Downgrade MRR will increase as the business progresses to a certain extent, so it will be important to maintain a high SaaS Quick Ratio.

For your reference, here is an overview of how we view the SaaS Quick Ratio figures.

If Quick Ratio is less than 1

The business is shrinking and the future is considered extremely low.

When Quick Ratio is 1 or more and less than 4

At first glance, it looks like it’s going well, but it can be seen as a business that stops growing as soon as customer development slows down.

In other words, it is a business that is expected to shrink over time (expansion of market share).

When Quick Ratio is 4 or more

It can be seen that the business is growing efficiently. There is also data that says, “The average Quick Ratio for SaaS companies with an annual growth rate of over 50% is 4.”

So what kind of measures are necessary to improve MRR? It depends on which MRR is the bottleneck.

• New MRR is a bottleneck
  To acquire new customers, it is thought that measures to achieve “increase the number of leads” or “improve the conversion rate” are required.
• Downgrade MRR seems to be required to take measures to strengthen “onboarding” and “user support” in order to improve the frequency of using bottleneck services .
• It is thought that Expansion MRR is required to take measures to realize “improvement of customer loyalty” in order to improve bottleneck purchase frequency and realize upselling/cross-selling .
• In order to prevent bottleneck
  cancellations, Churn MRR is expected to listen to customer feedback and improve services, while at the same time implementing measures to realize onboarding and enhanced user support. . Setting up a customer success mindset or a dedicated department can also help.

On the other hand, it is said that many SaaS businesses should prioritize improving Churn MRR.

The following is confirmed by Frederick F. Reichheld, Honorary Director of a major US consulting firm.

• The cost of selling to existing customers is one-fifth the cost of selling to new customers
• Improving churn rate by 5% improves profit by 25%

In other words, rather than aiming to improve New MRR, improving Churn MRR for existing customers is less costly and more likely to lead to greater profits .

Also, for details, please see another article on this site, “What is the churn rate that determines the fate of SaaS? Calculation method and 5 effective measures “, but the churn rate in a certain business is “-2.5%” When comparing the case where the churn rate was “5%” and the case where the churn rate was “5%”, it is calculated that “approximately four times the difference in MRR” will be created after five years.

From this, we can see that it is important to start with Churn MRR in order to improve MRR.

It is no exaggeration to say that in the SaaS business, where it is difficult to secure short-term profits and aiming for stable profits over the long term, external funding is now an essential management strategy.

It will be difficult to get good responses from investors if you just list numbers without understanding “What are the KPIs required for your current business?”

Of course, it is essential to set KPIs for each phase and prioritize issues not only for investors’ reactions, but also for growing your own business from a long-term perspective.

We recommend that you re-understand your company’s business phase and review the KPIs that should be emphasized, not just MRR and Quick Ratio.