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While monthly Recurring Revenue (MRR) is theoretically a simple metric to calculate, it does have some intricacies and edge cases that can trip entrepreneurs up a bit.
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Here are 6 things to look for and remember as you examine your company’s recurring revenue.
Incorrectly accounting for non-monthly billing intervals
MRR is, by definition, a “monthly” figure. But obviously, “monthly” isn’t the only way to bill a customer. The most common additional billing interval is annual, but quarterly and weekly billing are also common.
So, how do you properly include those non-monthly intervals into a monthly recurring revenue figure? You normalize it.
For example, if you bill someone $1,200 annually, you simply divide that number by 12, meaning that the $1,200/year customer shows up as $100/mo in your MRR figure.
What about weekly? Well, there are 52 weeks in a year, so you’d divide 52 by 12, which gives you 4.33 as a multiplier. So, if you billed $10 per week, you’d say $10 * 4.33 for $43.30 in MRR.
Including non-recurring revenue
Monthly Recurring Revenue is meant to measure your company's growth and future health. If you start including one-time setup fees or even monthly installments (“3 easy payments of $19.99”), you’re artificially inflating your MRR figure and generally setting yourself up for a bit of a letdown.
If a payment doesn’t automatically recur in perpetuity until a customer decides to stop the service, then it shouldn’t be included in your MRR figure.
Treating MRR as an accounting figure
MRR is, in no scenario, a figure that should be used for accounting or tax purposes. It’s a business insights figure, not an accounting figure. When you want to start talking accounting terms and figures, you’ll be interested in Bookings, Billings and Deferred Revenue. But MRR is not a number you’ll be using with your accountant.
Monthly Recurring Revenue is meant to track growth trends and give you insights into where revenue growth comes from.
Including leads and trials
“Oh, cool, someone just started a trial on a $500/mo plan! Let's throw them in our MRR figure!” Nope! Don’t do that. Yes, a certain percentage of trials and leads will convert and become part of your MRR. And yes, your conversion rate may be extremely consistent and reliable, but you’re talking about a different metric.
You aren’t helping anyone by artificially inflating your MRR figure with customers who might start paying you.
Ignoring MRR components
Your MRR is actually made up of lots of different factors!
- New MRR — MRR from new customers
- Expansion MRR — MRR from existing customers (upgrades)
- Reactivation MRR — MRR from previous customers
- Contraction MRR — Lost MRR from existing customers (downgrades)
- Churned MRR — Lost MRR from canceled customers
Each type of MRR tells a story and gives you insights into the “why.” If you’re only looking at the top-level MRR figure, you could be missing huge red flags, such as high churn that is currently masked by high growth (but definitely won’t be forever).
Ignoring coupons & discounts
Let’s have a quick heart-to-heart. Do you really think you should include the full value of a $250/mo customer if you’re giving them a 50%-off coupon? No, you should not.
Maybe that coupon is just temporary (i.e. 50% off for 3 months), or maybe it’s a permanent discount. You’re reducing the value and revenue from that customer in a real and tangible way that you need to consider when calculating MRR. Otherwise, you’re artificially inflating your MRR figure.
Yes, this makes calculating MRR more complicated and difficult, so using a tool like Baremetrics (which automatically considers all of these types of edge cases and scenarios) quickly becomes a no-brainer.
Take the guesswork out of MRR with Baremetrics. Start your free trial now!
Are you making these mistakes?
If you’re making these mistakes or need help with your metrics, we’d love to chat and help! Here at Baremetrics, we’ve worked with thousands of companies and account for nearly every edge case imaginable to make sure you get the most accurate and useful MRR possible…all with nearly zero work on your part. ✨
