Understanding Monthly Recurring Revenue (MRR)

What is MRR?

Monthly Recurring Revenue (MRR) can be thought of as the total amount of monthly revenue you can reliably expect to receive on a recurring basis. It is one of the most important metrics for a SAAS business to track, as it provides a forward looking measure of growth and predicted revenue.

How is MRR calculated?

You can calculate the approximate MRR by summing the monthly-normalized amounts of all subscriptions from which payment is being collected at that time. For example, an annual subscription for $1,200 only counts $100 towards your MRR. This includes subscriptions in the status=active and status=past_due states. Learn more about subscription states here.


Another way to think about computing MRR is that it is the # of customers multiplied by the steady state amount that they will be billed. For example, if a customer applies a 50% discount that is only valid for their first billing cycle to a $10 monthly subscription, the MRR will always be $10 from the time that the subscription transitions to active.


The reason that MRR cannot be calculated by simply summing invoice totals is because MRR is a forward-looking metric that is distinct from the immediate cash flow you are about to receive. For instance, past one off invoices cannot be relied upon to generate future revenue.

What causes changes to MRR?

The four major ways to change MRR are through new subscriptions, expansions, contractions, and churn.

New Subscriptions

This occurs when a new or existing customer starts a new active subscription, or upgrades from a free subscription to a paid subscription.

Expansion

This occurs when an existing paid subscription is upgraded or modified to increase its MRR. This can happen by adding or changing a plan, increasing the quantity, or lowering a discount.

Contractions

This occurs when an existing paid subscription is downgraded or modified to decrease its MRR (to a non-zero amount). This can happen by removing or changing a plan, lowering the quantity, or increasing a discount.

Churn

This occurs when an existing paid subscription is either canceled, scheduled to be canceled, downgraded to a free subscription, paused, or becomes delinquent. Note that when the trial ends on a new subscription for a customer without a saved payment method, the subscription briefly moves from status=trialing to status=active before the first invoice fails payment, and the subscription becomes status=past_due.

Ways to grow your MRR

To grow your MRR, it’s best to recall the four ways that MRR changes and focus on developing your pricing model to optimize each category. Here are a few simple ways to improve:


Reduce free plans

Free plans don’t count towards your MRR. Your goal should be to convert as many potential customers to paying subscribers as possible. Whenever possible, use a trial instead. Converting a trial to a paid subscription is usually easier than converting a free plan to a paid one.

Upsell or change your pricing model

If correctly implemented, add-ons and metered-billing are effective ways to upsell your existing customers. Building valuable tools on top of your core product makes it easy to add news plans to an existing subscription. Offering per-seat or per-usage billing means your revenue can grow with your customers.

Reduce involuntary churn

Stripe offers products like automatic card updates and Smart Retries to reduce the involuntary churn a normal business might encounter due to expired cards, lost cards, or various network failures. You can also email your customers after a payment failure using webhooks, or have Stripe do it on your behalf by enabling the payment failures options in the Settings dashboard.

Common scenarios and how they relate to MRR

Discounts

If you apply a coupon with a forever duration, the discount will apply to your MRR. If you apply a coupon with a finite duration (i.e. once or repeating) to a subscription, your MRR is unaffected. For example, a 50% off coupon that has a duration of forever will halve that subscriptions MRR.

Tax

Billing does not consider taxes or application_fee to be revenue, so they will not count towards your Monthly Recurring Revenue (MRR).

Trials

Any subscription still in a trialing status does not count towards your Monthly Recurring Revenue (MRR), as the subscription is not active and there is no predictable revenue for that subscriber.

If a subscription transitions from trialing to active, the subscription will then count towards your MRR even if the first invoice is unpaid. Eventually, if the subscription is cancelled or marked unpaid, the subscription will no longer count towards your MRR and will also count towards your churn.

Delinquency

Once a subscription is unpaid rather than active, your MRR will decrease by the amount on the subscription. If you mark subscriptions as unpaid as your dunning final action, we consider a subscription delinquent at the time the following invoice is generated and automatically closed. For example, if you had your final payment attempt on the 8th but don’t bill until the 15th of the month, your subscription will be marked delinquent on the 15th.

Failed payments

A failed payment in itself will not affect a subscription’s MRR unless it is also the last retry amount, causing the subscription to go delinquent, i.e. transitioning to status=unpaid. See Delinquency above.

Cancellations

Once a subscription is canceled, the subscription no longer counts towards your MRR. If you cancel a subscription using cancel_at_period_end, the subscription will no longer count towards your MRR after the time of the API call, not at the end of the period when the cancellation goes into effect.

Metered billing

Metered billing is not included in Monthly Recurring Revenue (MRR) calculations, as the revenue can fluctuate significantly and is not predictable.

Refunds

One-off refunds, like one-off discounts, do not affect MRR unless it is due to a change in the Plan’s price.