Why it matters
Subscription businesses sell the same thing every month, and MRR is the plain total of that. It turns a mix of monthly, quarterly and annual plans into one number you can compare from month to month, which is the number most other metrics are built on.
The change in MRR matters as much as the level. A flat figure can hide a lot of new revenue offset by a lot of loss, and a rising figure can hide a leaking base. Splitting the change into its four movements shows which of those is happening.
The formula
In words: the sum of the monthly equivalent of every active subscription. A plan billed yearly counts at one twelfth of its yearly price, and a plan billed quarterly at one third.
In symbols:
MRR = sum of (plan price / months in the billing period) for every active subscription
closing MRR = opening MRR + new + expansion - contraction - churned- Count active, paying subscriptions only. Trials, one-off fees and usage that is not under contract stay out.
- Apply discounts the same way every month, either always before or always after.
- Use one currency, converted on a stated date, if you sell in more than one.
The four movements of MRR
- New: MRR from customers who started paying this month.
- Expansion: extra MRR from existing customers, for example through upgrades, more seats, add-ons or usage.
- Contraction: MRR lost when an existing customer moves to a cheaper plan or drops seats but stays.
- Churned: MRR lost when a customer cancels, or when a failed payment is never collected.
A worked example
Example numbers (made up for illustration): a business opened the month with a base of monthly recurring revenue, and four kinds of movement changed it.
| Line | Monthly recurring revenue |
|---|---|
| Opening MRR | $40,000 |
| New | +$6,000 |
| Expansion | +$2,500 |
| Contraction | -$1,000 |
| Churned | -$3,000 |
| Net new MRR | +$4,500 |
| Closing MRR | $44,500 |
Opening MRR of $40,000 plus net new MRR of +$4,500 gives closing MRR of $44,500. New and expansion add $8,500, contraction and churn take away $4,000.
How to improve it
MRR grows by adding to the first two movements and shrinking the last two.
- Win new customers with a clear offer and a short path from interest to first payment.
- Give existing customers a reason to grow, such as more seats or a feature on a higher plan.
- Look at contraction as a signal. Customers who downgrade are telling you something about the plan.
- Reduce churned MRR with recovery for failed payments and with attention to why customers cancel.
Common mistakes
- Counting an annual contract at its full yearly price in the month it is paid, which makes MRR jump and then collapse.
- Including one-off setup fees or a single spike in usage as if they would recur.
- Counting trials as MRR before the first payment is collected.
- Mixing gross and discounted prices from month to month, so the figure moves without any customer change.
Work it out with your own numbers
The MRR calculator builds the figure from your own plans and customer counts. Open the MRR calculator and enter your own figures. It runs in your browser and shows each step of the sum.
Read next
- ARR: the same number projected over a year.
- ARPU: MRR spread across paying customers.
- Expansion MRR: a closer look at one of the four movements.
Questions
How do I count an annual plan in MRR?
Divide its yearly price by twelve and count that amount every month the plan is active.
Do one-off fees count?
No. MRR covers revenue that recurs. A setup fee or a one-time purchase belongs in revenue but not in MRR.
What is net new MRR?
New and expansion added together, then contraction and churned taken away. That is the gap between opening and closing MRR.
Should trials be counted?
Not until the first payment is collected. A trial is a possible future subscription and not yet recurring revenue.