Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (MRR) is a critical performance metric that measures the predictable and recurring revenue a business can expect to receive each month. It’s the lifeblood of subscription-based companies, particularly in the Software as a Service (SaaS) industry, but it’s also relevant for any business with a subscription model, like a streaming service, a gym, or a “wine-of-the-month” club. Unlike a one-time sale, MRR represents a stable stream of income from customers who have committed to ongoing payments. For investors, MRR is a powerful lens through which to view a company's financial health, customer loyalty, and growth trajectory. It smooths out the lumpiness of one-off sales and provides a clearer, more reliable picture of a company's core operational performance. A steadily growing MRR is often a tell-tale sign of a healthy, scalable business with a product or service that customers find indispensable.

For followers of value investing, a company's quality and predictability are paramount. MRR is a fantastic tool for assessing these very traits. A consistent and growing MRR can be a strong indicator of a durable economic moat. It suggests that customers are “locked in,” either through high switching costs or because the service is simply too good to leave. This stickiness is a hallmark of a high-quality business. Furthermore, the predictability of MRR allows investors and management to forecast future cash flow with a much higher degree of confidence. This stability is precisely what legendary investors like Warren Buffett look for—businesses that operate like well-oiled machines, generating predictable profits year after year. A company with erratic, unpredictable sales is a much riskier bet than one with a solid base of recurring revenue. By tracking MRR, a value investor can gain invaluable insight into the durability and long-term potential of a business, helping to separate the fleeting successes from the truly great enterprises.

While the concept is straightforward, the calculation can be done in a couple of ways, from a simple overview to a more detailed, diagnostic approach.

At its simplest, MRR is the total revenue from all your subscription customers in a month.

• The Formula: MRR = Number of Monthly Subscribers x Average Revenue Per User (ARPU)
• Example: If a company has 1,000 customers all paying a €30 monthly subscription fee, the calculation is simple:

1,000 customers x €30/month = €30,000 MRR

To truly understand the health of a business, analysts break MRR down into its moving parts. This shows why the MRR is changing—is it from new customers, existing customers spending more, or customers leaving?

• New MRR: The monthly recurring revenue generated from brand new customers acquired during the month.
• Expansion MRR: The additional monthly recurring revenue from existing customers. This happens when they upgrade to a more expensive plan or purchase add-ons. This is a fantastic sign of customer satisfaction and value.
• Contraction MRR: The reduction in monthly recurring revenue from existing customers who downgrade their plans.
• Churned MRR: The total monthly recurring revenue lost from customers who cancel their subscriptions during the month. This is also known as customer churn.

This leads to a more dynamic formula that calculates the change in MRR from one month to the next:

• The Formula: Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churned MRR

A healthy, growing company will consistently have high New MRR and Expansion MRR, while keeping Contraction and Churned MRR as low as possible.

It's easy to confuse MRR with other financial terms. Here’s how to keep them straight.

MRR is a subset of total revenue. A company's total revenue might include one-time charges like setup fees, consulting services, or hardware sales. These are important for the business but are excluded from MRR because they are not recurring. MRR isolates the predictable, subscription-based portion of the business, which is the most valuable for assessing long-term health.

Annual Recurring Revenue (ARR) is a closely related metric. In most cases, it is simply MRR multiplied by 12.

• The Formula: ARR = MRR x 12

The choice between using MRR or ARR often depends on the business model.

• MRR is typically used by companies with shorter contract lengths, like month-to-month consumer subscriptions (e.g., Netflix).
• ARR is favored by enterprise SaaS companies that typically sign customers to one-year or multi-year contracts.

Essentially, they measure the same thing—the predictable revenue stream—just over different time horizons.

When you see MRR in a company's report, don't just glance at the headline number. Dig deeper. Ask yourself:

• What is the trend? Is MRR growing, flat, or declining? Consistent growth is what you want to see.
• What is the source of growth? Is the company succeeding at acquiring new customers (New MRR) or is it great at upselling existing ones (Expansion MRR)? A healthy mix of both is ideal.
• How bad is the leak? Is Churned MRR high? If a company is losing customers as fast as it gains them, it’s like trying to fill a leaky bucket—a sign of a weak product or poor service.

A strong, growing MRR, driven by new business and customer upgrades with minimal churn, is a powerful signal of a high-quality, sustainable business. For the discerning investor, it's a metric that speaks volumes.