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SaaS Metrics Refresher #2: Recurring Revenue

Welcome to the second installment of our SaaS Metrics Refresher course. This week we’ll get back to basics with recurring revenue. It’s not as straightforward as you might think!

Recurring revenue is the heart of every subscription business, and a key reason for the explosion of SaaS as a business model in recent years. In short, recurring revenue is all about predictable, long-term value — it’s in these characteristics where non-recurring revenue can fall short.

What is it?

Put simply, recurring revenue is any of your company’s revenue that’s highly likely to continue in the future. In terms of SaaS, that’s usually revenue from customer subscriptions. It’s predictable, stable and can be counted on with a high degree of certainty.

“Recurring revenue makes a company more stable and predictable both operationally and financially. This, in turn, lowers the risk associated with a company’s operations, though negative word of mouth or bad publicity can easily reduce this sense of security.”

Investopedia

Why is it important?

“The advantage of MRR is that because it’s pretty consistent and predictable, it helps your company more accurately forecast. Plus, calculating MRR encourages a growing SaaS provider to focus on achieving the essential short-term objective of building a steady revenue stream.”

Mikayla Middleton, ShipEngine

Recurring revenue compounds — it builds over time as you add more subscriptions. This is what makes businesses with a recurring revenue model so appealing. Adding a new customer means adding cumulative ongoing revenue.

Recurring revenue is important because to create a valuable, sellable company, you need to demonstrate how the business will continue to thrive once you’re gone. Long-term contracts are the best way to guarantee a stream of revenue in the future, but you can also create recurring revenue through a subscription service or membership club or even just by adding a line of consumables to what you sell.”

John Warrillow (@JohnWarrillow), author of Built To Sell: 8 Things That Drive The Value Of Your Business

Recurring revenue metrics & analysis

“Not all MRR should be treated alike. For example, you read crazy success stories about how so-and-so got to $100k MRR in their first year, then you find out that their cost of revenue is $120k/mo, so they’re just selling $1.20 for $1. Anyone can do that. MRR is definitely one of the most important metrics in SaaS, but profit margins are underrated”

Andrew Rasmussen (@a13n), Canny

Monthly recurring revenue (MRR): A measure of your normalized (amortized) monthly subscription revenue. If you have some annual subscriptions, you can normalize these (divide by 12) to calculate MRR.

Annualized run rate (ARR): Your MRR multiplied by 12 — a forecast of your annual revenue, based on MRR. This is often used as a rough benchmark for subscriptions, especially for investors.

🚨 Annualized run rate isn’t the same as annual recurring revenue! Here we’re simply forecasting revenue that hasn’t yet been earned.

Average revenue per account (ARPA): Your MRR divided by customer count — the average MRR across all customers. This is useful for measuring and tracking upsells and revenue growth from expansion.

💡 ARPA is also known as average revenue per customer (ARPC) or average revenue per user (ARPU).

Net MRR growth rate: The month over month (percentage) increase in net MRR. This is useful as an indicator of overall revenue growth in a SaaS business.

MRR growth rate = (Net MRR at end of period – Net MRR at beginning of period) / Net MRR at beginning of period * 100

Categorizing recurring revenue with MRR movements

Not all MRR is made equal! To get a more actionable view of your revenue, you can break it down into its component parts — what we call MRR movements:

When should you use ARR vs MRR?

MRR is the most popular metric for revenue in subscription businesses, and is generally a more actionable metric to use in analysis (if you’re trying to reach actionable results and make operational decisions). If you have primarily annual or multi-year contracts, lower transaction volume and high average contract value (ACV), ARR can be a useful metric to use. It’s also generally better aligned with your GAAP revenue, whereas MRR can differ significantly.


Resources and Further Reading

DOWNLOADABLES

The Ultimate SaaS Metrics Cheat Sheet (ChartMogul) — Our original cheat sheet gives a comprehensive overview of revenue-based metrics. This is the perfect starting point for everything MRR-based!

BASICS

SaaS Metrics 2.0: A Guide to Measuring and Improving What Matters (David Skok) — There’s a reason why David is commonly referred to as the “godfather of SaaS metrics”, and a lot of it is packed into this definitive post on all things metrics related.

Make Metrics Meaningful: how each team relates to MRR (ChartMogul) — Perhaps you’re bought into the concept of MRR, but what about the other teams across your company?

DEEP CUTS

How much of your MRR is slipping away? (ChartMogul) — Just one example of how MRR can be used in conjunction with other data to provide more actionable insights.

Mobile app monetization metrics for subscriptions (ChartMogul) — How do you measure mobile app monetization in the context of subscription revenue?