Visualize Your SaaS Recurring Revenue by Calculating MRR and ARR

Revenue, one of the most important metrics of the business world, and it holds great significance to the existence of any business. Similar to subscription businesses, the realization of recurring revenue pays off greatly in order to broaden the horizons of success for many other business types. The gravity of this term has grabbed the attention of the SaaS world, urging them to contemplate the calculation of this repeating income in the right and correct way.

Needless to say, SaaS companies depend substantially on recurring income to survive. However, most SaaS companies do not completely understand the significance of this crucial metric and how to best adopt a recurring revenue approach for their individual needs.

Consider yourself at the right place if you are confused about the computation and interpretation of recurring revenue in order to analyze the pitfalls and growth factors of your business. Our written guide will provide all the information you need on adopting recurring revenue and other nuances like monthly recurring revenue (MRR) and annual recurring revenue (ARR).

Let us, without further ado, dive straight to explore what recurring revenue is -

SaaS recurring revenue

The Software-as-a-service (SaaS) recurring revenue is generated as a result of companies offering their products or services on a regular billed, subscription basis. The flexibility that can be incorporated in this model, as well as the ensured regular income, is what’s made it a popular and successful model amongst both businesses and customers.

The SaaS recurring revenue model gained popularity at an astonishing pace because it allows companies to fuel their income generator on a regular basis, and customers to split payments over regular periods, such as monthly or annually. It also allows businesses to forecast their costs more accurately, react quickly to changes in customer demand, build customer loyalty, and eventually scale their way to success.

However, the escalation of SaaS businesses' growth is incomplete without the inevitable factors like negative cash flow and capital expenditure. But, if your business has a solid product to offer, customers are bound to return, which means the arrival of revenue automatically.

Recurring revenue is commonly categorized into monthly recurring revenue (MRR) and annual recurring revenue (ARR). Many recurring revenue providers, however, can build a revenue model to suit your exact needs. This is usually fuelled by the frequency in which your customers want to be billed for your product.

Factors affecting SaaS recurring revenue

A recurring revenue model is not a choice but a preference for software-as-a-service businesses. It is however common to experience fluctuations within this model which are driven by the number of customers a business has.

The Customer acquisition rate (CAC) and Customer retention rate are the two factors on which the success of a SaaS recurring revenue model depend.

1: Customer acquisition rate (CAC) -

Every SaaS business, regardless of its size and stage, should adopt effective customer acquisition strategies, including advertising, social media marketing, search engine optimization, and email campaigns to attract new customers. The metric holds a huge impact on revenue growth and overall business success.   

2: Customer retention rate -

Another area that businesses should adopt effective strategies for is customer retention. Having customers leave is a nightmare for any businesses, especially those with a recurring revenue model as it leads to a loss in revenue. A high customer retention rate indicates customer satisfaction, while a lower one signifies an upcoming plateau in your business's growth graph, which might follow a decline afterward.

What is SaaS monthly recurring revenue (MRR)?

Monthly recurring revenue (MRR) is considered one of the most important SaaS metrics, as it indicates the repeating monthly remuneration of a business. As per a report, the majority of B2B subscription businesses offer a monthly subscription plan to their customers for a fixed amount which makes it a strong indicator of companies' growth. The fee is then paid each month as long as customers decide to utilize your services which eventually brings a clear picture of predictable SaaS recurring revenue to the business.

Opposed to one-time sales that may or may not lead to return custom, SaaS monthly recurring revenue helps businesses identify the long-term health of their business, the opportunities to increase customer lifetime value, the ways their revenue streams change over time, the ways to make strategic decisions to improve their performance, and the trends in customers' behaviour such as whether the customers are renewing their subscriptions or cancelling them. Additionally, suppose a business has a great handle on churn rates and customer acquisition. In that case, it is even easier for businesses to predict their future MRR and make informed decisions about their business.

Types of SaaS monthly recurring revenue (MRR)

Tracking down not only the top-level MRR but the other substantial factors which can influence MRR over a significant period is crucial as your subscription-based business grows.

The six types of SaaS monthly recurring revenue are as follows -

New subscriptions MRR -

A MRR revenue that can be expected from newly acquired customers.

Reactivated subscriptions MRR –

These are subscriptions that have been reactivated by customers after a period of ‘non-use’. This can happen when a customer cancels and re-joins, or pauses a subscription for a period of time. This calculation needs to be done separately from the new MRR.

Upgraded subscriptions and add-ons MRR -

A subscription plan that has been upgraded or upscaled by add-ons reflects customer satisfaction, commitment, and contentment with your services or products. It is nothing but an umbrella term for expansion MRR.

Downgraded subscriptions MRR -

Downgraded subscription MRR serves only as an all-encompassing phrase for contraction MRR. A sign of dissatisfaction of customers, the downgraded subscriptions accounts for monthly revenue loss.

Cancelled subscriptions or churned MRR -

Loss to your monthly recurring revenue is devastating, no matter the type, be it a cancelled subscription or a downgraded subscription. The total contraction MRR, is an indicator of monthly revenue loss and is calculated using both cancelled subscriptions and downgraded subscriptions. This subscription is also commonly referred to as churned MRR.

Customer renewals MRR -

A SaaS customer renewal monthly recurring revenue includes customers with ongoing subscriptions, which might fluctuate over a given period of time during their commitment to your business.

How to calculate net MRR?

The MRR calculation formula is defined as -

Net MRR = New MRR + Expansion MRR - (Churn MRR + Contraction MRR)

Net MRR = New MRR + Expansion MRR - Churn MRR - Contraction MRR

The calculation of SaaS monthly recurring revenue requires taking into account the total value of all the recurring subscriptions that are billed in a month, and subtracting any discounts offered, refunds issued, or cancellations.

The number of subscribers who have either signed up for the first time, renewed their subscription, or upgraded their subscription plan is multiplied by the subscription fee to determine the new MRR and expansion MRR. Similarly, the churned and contracted MRR can be calculated by multiplying the subscription fee by the number of subscribers who have contracted their plans or downgraded their subscription plans.

What is SaaS annual recurring revenue (ARR)?

ARR, which stands for annual recurring revenue, is the same as MRR; however, the only distinction is that ARR is calculated on a yearly basis rather than on a monthly basis. The term is beneficial for software as a Service (SaaS) company that offer long-term subscription plans and help them in valuation conversations and end-of-year calculations.

A recurring fee, usually on an annual basis, is paid by customers to SaaS businesses to access a software application or service. The payment is typically a flat fee paid in advance or an instalment plan that a customer pays over the year.

Any SaaS company benefits from an annual recurring revenue model in regard to steady income, customer loyalty, attracting new customers, increase revenue, forecast revenue, and many more. This approach provides companies the relevance of expected revenues to repeat with the measurement of company progress.

This useful metric gives momentum and strength to the company in terms of new sales, renewals, and upgrades while also clarifying and analyzing company health. This key metric not only highlights the areas where revenue is being lost but also helps make the best decisions regarding operational planning and financing to improve and upscale their bottom line and increase company efficiency.

How to calculate SaaS ARR?

The calculation of annual SaaS recurring revenue is as simple as measuring monthly recurring revenue.

One method is to calculate the MRR over 12- a month period, which makes the ARR.

ARR = MRR x 12

Or it can also be determined by considering the average revenue per user (ARPU)
ARR = Number of Paying Users x ARPU

The calculation of ARR requires certain components to be focussed on to ensure greater accuracy. In some ways, these are the same as they are for monthly recurring revenue. These components include:

New sales ARR
Renewals ARR
Upgrades and upsets in mid-term or at renewal time
Downgrades and product changes in mid-term or at renewal time ARR
Churned customers ARR

Using these components, the ARR can be calculated as follows:

ARR = Yearly subscription revenue + expansion revenue - churn loss

Ensuring accuracy in your calculations includes fixed contract fees while separating single charges (or variable revenue). The involvement of any extra charges can ruin the preciseness of your annual recurring revenue register.

Note: - As long as the subscription period is a year or more and is reported the same regardless of how payments are structured, the billing cycle has no impact on ARR.

Final Verdict

While calculating SaaS recurring revenue might be challenging for businesses, a greater understanding of recurring revenue components encourages growing revenue flow and error-free recurring reports.

At Billsby, we calculate and display your companies MRR on your dashboard when you log in. To find out more, why not book a demo with one of our incredible onboarding experts.