What does MRR stand for and why does it matter to startups?

TLDR; MRR stands for Monthly Recurring Revenue.

It is a critical metric used by SaaS (Software-as-a-Service) and subscription-based businesses to measure the total revenue generated from recurring subscriptions or contracts on a monthly basis.

MRR helps businesses understand and track the financial health and growth of their recurring revenue model. It provides insight into the performance and stability of a business by analyzing the consistency of its revenue stream.

How to estimate your MRR?

• Calculating MRR also enables businesses to forecast future revenue, assess customer retention and churn rates, and determine the lifetime value of a customer.
• Investors and stakeholders often consider MRR as a key metric to evaluate the overall success and valuation of a subscription-based company.

The MRR formula is quite simple:

MRR = total number of paying customers * average revenue per user (ARPU)

For example, if you have 90 paying customers, each paying an average of $75/month, then your MRR is 90*75 = $6750

Why should MRR matter to you?

MRR, or Monthly Recurring Revenue, is a crucial metric for any business, particularly for subscription-based models. Here's why MRR matters:

• Predictability: MRR provides a predictable revenue stream, allowing you to forecast financials more accurately. Deciding on marketing budgets and other allocations definitely takes into account your ability to generate cash.
• Growth: tracking changes in MRR over time helps assess the scalability and growth potential of a business.
• Customer retention and loyalty: MRR highlights the value and stickiness of a subscription-based customer base, serving as a metric for customer loyalty and retention efforts.
• Financial health: MRR offers insight into the overall financial health of a company, enabling better decision-making and resource allocation. In addition to generating stable recurring revenue, we explain which other significant risk factors might lead your SaaS business to fail. We also advise methodically planning your go-to-market strategy.

📢 But first, before having paid customers and MRR, you have to make sure you enroll core early adopters. They will be your future customers 💵

Is there a better metric for your Saas startup financial health?

MRR does not provide a complete picture of the business. There are better metrics to consider when trying to measure your company's financial health and stability. For example:

• The ARR (Annual Recurring Revenue) takes into account the annual revenue generated by each customer or cohort and provides a more accurate measure of long-term revenue stability and growth potential.
• The CAC (Customer Acquisition Cost) determines the efficiency and profitability of acquiring new customers.

Overall, using a combination of metrics like MRR, ARR, and CAC can provide a comprehensive understanding of a SaaS startup's financial health.

Advanced Saas profitability metrics

There are many more advanced metrics one can rely on:

• Customer Lifetime Value (CLTV): calculates the net value a customer brings to the business throughout their entire relationship.
• Gross Margin: evaluates the profitability of a company by subtracting the cost of goods sold from the revenue and dividing it by the revenue.
• Churn Rate which measures the rate at which customers are leaving a Saas company, representing the impact on revenue and growth.
• Burn Rate: displays the rate at which a company consumes its cash reserves, indicating financial stability and runway.
• EBITDA for Saas (stands for Earnings Before Interest, Taxes, Depreciation, and Amortization) which is a key financial metric used to evaluate the profitability and performance of Saas companies.

The EBITDA helps investors and analysts assess the company's ability to generate cash flow before accounting for non-cash expenses and interest payments. It provides insight into the operating profitability and efficiency of a Saas business, disregarding the impact of financing decisions and tax regulations. It is one of the preferred financial indicators for investors.

Extra insights are provided by our survival guide to simple startup product analytics which thoroughly explores the essential metrics and data-driven strategies necessary for new startup business growth.

That's all for today folks, stay tuned with Stimpack, your early-stage product growth platform 🤗