monthly_recurring_revenue_mrr [CapiPedia]

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======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.
===== Why MRR Matters to Investors =====
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.
===== Calculating MRR =====
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.
==== The Basic Formula ====
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.
==== A More Detailed Look ====
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).
===== MRR vs. Other Metrics =====
It's easy to confuse MRR with other financial terms, but the distinctions are critical for a sharp analysis.
==== MRR vs. Annual Recurring Revenue (ARR) ====
[[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.
==== MRR vs. Bookings and Revenue ====
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.
===== The Value Investor's Perspective =====
A smart [[Value Investing|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.