Are you curious about what MRR and ARR mean in the SaaS world? Do you want to learn how to calculate and forecast them? Then you're in the right place!
In this blog post, we'll explain everything you need to know about these key metrics and why they matter for your business. Let's get started.
➡️ What is MRR & ARR?
MRR stands for Monthly Recurring Revenue, which is the amount of money you earn from your customers every month. ARR stands for Annual Recurring Revenue, which is the amount of money you earn from your customers in a year. These metrics reflect how much customers are willing to pay for your product on a regular basis, which shows their loyalty and satisfaction.
➡️ What’s so great about MRR & ARR?
There are many benefits of having high MRR and ARR for your SaaS business, such as:
🎯 High margins: You don't have to spend a lot on the cost of goods sold (COGS), such as hosting and customer support. This means you have more money left to invest in sales, marketing, and product development.
🎯 High predictability: When customers pay you every month or every year, you can easily forecast your revenue and plan your budget. You also reduce the risk of losing customers unexpectedly, as they are committed to your product for a longer period.
🎯 Favorable cash position: When customers pay you upfront for a year, you have more cash in hand to grow your business faster. Cash is king, especially for startups that need to scale quickly.
🎯 Simple accounting: With the right tools, you can easily track and report your MRR and ARR without much hassle. You can also use them to measure your performance and growth over time.
➡️ How do you calculate MRR & ARR?
Calculating MRR and ARR is not as hard as it sounds. The basic formula is to add up the monthly or annual contract values of all your customers. But that will only give you the ENDING MRR / ARR for a given period. You also need to understand the MOVEMENTS in MRR / ARR, which are the changes that happen due to customer behavior. Here are the most common categories of movements:
➕ New MRR / ARR: This is the MRR or ARR that you gain from new customers who sign up for your product.
➖ Churn MRR / ARR: This is the MRR or ARR that you lose from existing customers who cancel their subscription or stop using your product.
➕ Expansion MRR / ARR: This is the MRR or ARR that you gain from existing customers who upgrade their plan or buy more features or services from you.
➖ Contracted MRR / ARR: This is the MRR or ARR that you lose from existing customers who downgrade their plan or reduce their usage of your product.
By tracking these movements, you can see how your MRR and ARR are affected by customer acquisition, retention, and expansion.
➡️ How can you forecast MRR & ARR?
Forecasting MRR and ARR is not rocket science either. If you have historical data on how much of your opening MRR / ARR each month goes to the above buckets (new, churn, expansion, contraction), you can use that to project your future MRR / ARR based on some assumptions. For example, if you know that on average 10% of your opening MRR each month comes from new customers, 5% is lost due to churn, 3% is gained due to expansion, and 2% is lost due to contraction, you can use these percentages to estimate your ending MRR for the next month. Of course, these numbers may vary depending on factors such as seasonality, marketing campaigns, product updates, etc., so you should always adjust them accordingly.
That's it! You've learned the basics of SaaS MRR and ARR. 💰
💰I hope this blog post was helpful and informative. Do you have any questions or comments? Feel free to share them below! 💰
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