A Reminder: MRR
Monthly Recurring Revenue (MRR) is a calculation of your normalised (amortized), monthly subscription revenue. If your SaaS pricing model uses a monthly subscription, your MRR is simply the total of all your customers’ subscriptions. If you have annual subscriptions, you should divide these by 12 to calculate MRR.
MRR Calculations should always exclude any one-off payments and metered charges for customers – we only want to look at the recurring portion of revenue.
Example: If I have 120 customers, each paying $60 per month in subscriptions, my MRR is $7200.
CMRR as a metric is often misunderstood. It doesn’t help that to begin with, it’s often found under two different names:
- Committed Monthly Recurring Revenue
- Contracted Monthly Recurring Revenue
So what’s the deal here? Are these two different variations on the same metric?
Committed Monthly Recurring Revenue and Contracted Monthly Recurring Revenue are the same metric. When you see each of these names, they refer to the same thing. To avoid further confusion, we’ll just refer to it as CMRR.
Defining CMRR isn’t so easy. There is no fixed definition, and there are certainly no fixed rules about what to include in the formula. Here’s what most businesses provide as a definition:
“CMRR is the value of recurring portion of subscription revenue.”
Hmm. That doesn’t really tell us much! I thought MRR was just about the recurring revenue portion of a business anyway, how is this different? Because CMRR is a metric that’s also used in more traditional fixed-term-based payment structures (i.e. non-recurring revenue). For non fixed-term-based models (SaaS, subscription), we can use a slightly clearer definition of what CMRR really equates to:
“CMRR for a SaaS business is a projection of MRR in a future period, modified to take into account any guaranteed revenue expansion or anticipated churn over the period.”
Now that makes more sense as a definition for subscription businesses. CMRR is similar to MRR, but gives us a more realistic projection of monthly revenue, accounting for adjustments to recurring revenue that we already know about.
What’s Included in CMRR?
- MRR! You still need to include the core MRR of your business.
- Guaranteed new business that you know about for the period – e.g. If a customer has signed a contract for an account with you which only comes into effect in the following month – you can include this New Business MRR in your CMRR calculation.
- Guaranteed account expansion from upgrades that you know will take place in the period – e.g. If a customer is on a plan that requires them to upgrade after a certain time, this is expected Expansion MRR that you can include in your CMRR calculation.
- Anticipated churn for the specified period – e.g. A customer has stated that they don’t intend to renew their account in the following month, so you can factor this as churn in your CMRR calculation. Note: This churn is not 100% guaranteed – you still have the chance to reverse the customer’s decision!
- Anticipated downgrades for the specified period – e.g. You expect the customer to downgrade their account, due to either the customer stating so, or to features of your pricing model.
I have 120 customers, each paying $60 per month in subscriptions. For the next month I have a guaranteed expansion MRR of $1200 and an expected churn of $500.
My CMRR for the next month is 7200 + 1200 – 500 = $7900.
Here’s a visual representation of the difference between measuring MRR and CMRR:
At a high level, the formula for CMRR is fairly simple:
Despite this simple formula, there may be other elements that could be included in the CMRR calculation – there is no standard definition for this so you’ll need to decide what makes sense for your business.
Where can it be useful?
CMRR is always a forward-looking metric, i.e. it’s only applicable when calculated for future time periods, where you have potential expansion and churn that hasn’t happened yet.
Because of this, CMRR paints a more realistic picture of a recurring business. Particularly in the case of a high churn rate, CMRR would produce a slightly more pessimistic outlook – taking into account the anticipated churn (although additional revenue from expansion may balance this out).
Here are some uses of CMRR:
- CMRR appears to be more of a “VC metric” – i.e. something that investors would want to see, particularly as an indicator of the health of a business, based on projections.
- As Philippe Botteri (Accel Partners) mentions, breaking down the average CMRR by different dimensions (such as per customer) can lead to a more insightful analysis.
- Christoph Janz (Point Nine Capital) also mentions that CMRR is more relevant for enterprise-targeted businesses, where the sales cycles are typically much longer and the need for such projections are greater. Smaller SaaS startups selling mainly monthly deals to SMBs may not find so much use in the metric.
The Single Most Important Metric?
Here’s what Bessemer Ventures say about CMRR in their Laws of Cloud Computing report:
“This single metric gives you the purest forward view of the “steady state” revenue of the business based on all the known information today. The monthly focus also tends to drive many positive behavioral changes within a team including a monthly sales and development cadence, better sales compensation plan and cash flow alignment, reduced customer price sensitivity, and heightened awareness around small MRR changes. Many leading cloud companies therefore use CMRR as the basis for everything from the financial model to the sales commission plan. This is the single most important metric for a cloud business to monitor, as the change in CMRR provides the clearest visibility into the health of any cloud business.”
There’s no doubt that CMRR can be used in SaaS businesses to give a more accurate projection of recurring revenue, by taking into account expected adjustments to the core MRR. However, for most SaaS startups, it’s not clear how it can be useful on a day-to-day basis for measuring and growing the business. You’ll be required to develop your own definition – and the added complexity may not add much value over simply using MRR.
If you want to read more on CMRR, and the nuances of calculating and using it, check out the following resources:
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— ChartMogul (@ChartMogul) December 2, 2015