Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (MRR) is a vital performance metric that calculates the predictable, recurring revenue a business can expect to receive each month. It is the lifeblood of subscription-based companies, especially in the Software as a Service (SaaS) industry, and a key figure that investors watch like a hawk. Unlike one-time sales, which can be lumpy and unpredictable, MRR represents a stable stream of income from customers who pay on a repeating basis. This predictability makes it far easier to forecast future revenues, manage cash flow, and assess the underlying health and growth trajectory of the business. For investors, a steadily growing MRR is a beautiful sight, signaling that the company is successfully acquiring new customers and retaining its existing ones, building a solid foundation for long-term value.

Think of a traditional shop that sells shoes. One month it might sell 1,000 pairs, and the next, only 200. Its revenue is volatile. Now, imagine a “Shoe-of-the-Month Club” where 500 members pay a fixed fee every month. The owner knows, with a high degree of certainty, how much money is coming in. That's the power of recurring revenue, and MRR is how we measure it. For an investor, MRR provides a clear window into a company’s operational performance and stability. It smooths out the noise of individual sales and focuses on the core, sustainable business. A company with high and growing MRR is often more resilient during economic downturns and can plan for future growth with much greater confidence. It’s a sign of a “sticky” product that customers love and are willing to pay for month after month.

While the concept is straightforward, the calculation can have a few layers. It’s important to understand not just the total MRR, but also the moving parts that cause it to change.

At its simplest, MRR is the total number of monthly subscribers multiplied by the average revenue per customer. MRR = Total Number of Customers x Average Revenue Per User (ARPU) For example, if a company has 1,000 customers each paying €50 per month, the MRR is 1,000 x €50 = €50,000.

In reality, customers are always coming and going, or changing their plans. A more sophisticated view of MRR breaks it down into components to understand why it changed from one month to the next.

• New MRR: Revenue generated from brand-new customers acquired during the month.
• Expansion MRR: Additional revenue from existing customers. This happens when they upgrade to a more expensive plan, add more users, or buy an add-on service. This is a fantastic sign of a healthy business.
• Contraction MRR: The opposite of expansion. This is lost revenue from existing customers who downgrade their plans or remove users.
• Churn MRR: The total revenue lost from customers who cancel their subscriptions entirely. High churn is a major red flag for investors.

The net change in MRR for a month would be: (New MRR + Expansion MRR) - (Contraction MRR + Churn MRR).

It's easy to confuse MRR with other financial terms, but the distinctions are critical for a sharp analysis.

Annual Recurring Revenue (ARR) is simply MRR multiplied by 12 (ARR = MRR x 12). The two metrics measure the same thing but on different time scales.

• MRR is typically used for businesses with monthly subscription plans or shorter contract terms, as it provides a more granular, up-to-date view.
• ARR is favored by enterprise SaaS companies that sign clients to annual or multi-year contracts. It gives a better sense of the company's scale over a longer term.

This is a crucial distinction. MRR is a performance metric, not an official accounting term under GAAP or IFRS.

• Bookings: This refers to the total value of a contract signed with a customer. If a customer signs a €1,200 annual contract, the booking is €1,200, but the MRR is only €100. Bookings represent a commitment to pay, not cash in hand.
• Revenue: This is an official accounting figure. It’s the portion of a contract’s value that is recognized as it is “earned.” In our €1,200 annual contract example, the company would recognize €100 in revenue each month. While the recognized revenue might equal the MRR in this simple case, MRR specifically isolates the recurring component, ignoring one-time fees for setup or consulting.

A smart value investor doesn't just look at the top-line MRR number. They dig into the details to understand the quality of that revenue. A business that grows its MRR primarily through “New MRR” might be spending a lot on sales and marketing. However, a business with high “Expansion MRR” is demonstrating incredible strength. It means its existing customers are so happy that they are choosing to spend more money. This is highly efficient growth and a strong indicator of a competitive Moat. Conversely, a high “Churn MRR” suggests customers are unhappy, the product isn't delivering value, or competitors are luring them away. By analyzing the components of MRR, an investor can get a much clearer picture of a company's long-term viability and true growth potential.