How Confident Are You That You’re Reporting MRR (Monthly Recurring Revenue) Correctly?
Like most things in life and business people commonly make the same mistakes. SaaS Founders that have ever been through due diligence – raising money from investors, securing a business loan or selling a business – have likely learned a thing or two along the way about MRR.
MRR (Monthly Recurring Revenue) is the core unit economic of SaaS. It’s as basic a unit as kilometers, miles, pounds, dollars, etc. but it is not as scientifically defined and there are no regulated scales from which you can clearly measure it. The accounting industry refers to it as a “Metric” and that essentially means that it is outside the scope of accounting governance.
An MRR metric measures where you are at today. Similar to your weight it is a single metric, but doesn’t give you any indication of health. Tracking MRR over time gives you a more accurate story with regards to your performance. Month over month MRR growth rate is similar to tracking km/hr as it is a measure of revenue velocity. MRR metrics like Gross Recurring Revenue and Net Recurring Revenue indicate the retention of MRR from customers over time.
The stronger your MRR growth and retention, the more valuable your business is becoming.
The valuation curve is not linear – it’s exponential. This makes SaaS M&A a high stakes game that you want to be ready for.
Here are a few things to keep in mind with regards to MRR and your SaaS Metrics:
1. Choose MRR over ARR
When deciding between MRR and ARR (Annual Recurring Revenue) as your core unit economic, choose MRR. Annual subscriptions are commonly sold in annual licenses so there is a tendency to talk in terms of ARR when it comes to sales. When you select ARR as your basic unit economic you are adding a complexity of translation for the majority of financial conversations. Learn to speak MRR so that you get your team similarly aligned.
2. Choose Revenue over Sales
When deciding between Sales and Revenues for tracking MRR, choose Revenues. Monthly Recurring Revenue is Revenue and Revenue is different from Bookings or Sales. Revenue recognition is a higher threshold that includes conditions of Performance. Performance occurs when the seller has done what is to be expected to be entitled to payment. That piece can mean different things to different businesses. If you need to install, integrate, train, customize or onboard your clients then you may have a delay – and in some cases a lengthy one – between when your sales rep closes the deal and when you have truly satisfied the conditions required to defend against customer payment. Make sure all conditions are satisfied before you report MRR.
3. Churn
When reporting Churn, consider it Churn MRR. If a customer tells you 10 months into their 12 month agreement that they will not be renewing with you at year end, you will continue to recognize MRR for 2 months assuming they have paid or are still contractually obligated to pay for the remainder of the existing contract. The first month that you would recognize $0 MRR is month 13th. Assuming a $12k annual contract the Churn MRR reported on month 13 is $1k.
To recap – because MRR is your basic unit economic in any given month you should be able to report New MRR, Churn MRR and Expansion and Contraction MRR (a.k.a. upsells and downgrades) which will tie together your starting and ending MRR values.
If you need any assistance with your reporting our team at Numbercrunch can help you today!
Author: Susan Richards
