For your business to run smoothly, you need to evaluate how your business's parameter is continually performing. Your control over every parameter will determine how quickly you can adapt to any changes and make quick decisions so that the company doesn't suffer. Using various analytical tools to understand how your business functions are performing will give you a distinct competitive advantage and help grow your business sustainably.
Out of the many parameters used to analyze your business's performance, some are required by the government to be reported. In contrast, some are required to be audited and reported in your financial reports for your shareholders. However, apart from these parameters, few parameters may not be required to be reported either to the government or shareholders but are essential for you to understand whether your business strategy is functioning correctly. One such parameter is the recurring monthly revenue, also known as MRR.
MRR is a crucial parameter to define how your business is performing every month. MRR or Monthly Recurring Revenue is the sales figure your business is generating every month. To explain what is MRR, let us take a basic example.
Suppose you are into a business of office supplies. You have received an order of $1800 from one of your customers. But the customer requires the delivery of the materials to be spread over six months. In this case, you can find out the MRR by merely dividing the total order value by the number of months. The MRR comes to ($1800/6) = $300. If you calculate the MRR for all your customers, you will get the overall MRR for your business.
We covered a basic example in the above section. Let us dive deeper into the other ways you can look at MRR and determine which one suits you the best to measure your business's performance.
To analyze how much additional business your sales team can bring in from existing accounts, you can calculate an MRR known as the Expansion MRR. This is an excellent way to measure your sales team's upselling and cross-selling abilities.
In the above example, if the customer increases the order value to $2400, keeping the delivery schedule the same, then the Expansion MRR will be (2400-1800)/6 = $100.
To keep growing your business, you need to keep acquiring new accounts. This MRR calculation will help you understand how capable your team is of generating business from new accounts. It will also give you an insight into how effectively prospective leads are getting converted into business.
If we consider it a new customer in the above example, then the New MRR will be $300.
Even though you will never want this to happen, there will be instances of customers reducing their business with you. It may not necessarily be because of a failure of your sales strategy or lack of performance of the sales team, but there may be many other factors resulting in the decline of revenue from an account.
In the above example, if the customer reduces the order value to $1200, keeping the delivery schedule the same, then the Churn MRR will be (1800-1200)/6 = $100.
To find out the overall MRR of your business, you need to consider all of the above MRR types. The New MRR and Expansion MRR indicate increased monthly revenue, whereas the Churn MRR suggests a monthly revenue decrease.
To calculate the Net MRR, you need to add the New MRR figure with the Expansion MRR figure and subtract the Churn MRR value. If the Net MRR value is positive, then it will mean that your business is in the growth phase, and if it is negative, it will mean that your business is facing degrowth.
When you know what your monthly revenue has been in the past and how much monthly revenue you are expecting in the future, you can most importantly get a picture if your strategic decisions are going in the right direction as you wanted.
Not only this, but you can also use it to plan for the future and plan the direction in which you want to take your business. MRR is an essential parameter for your business because:
Many businesses also use another technique to determine their monthly revenue figures. It is done by finding the average revenue generated per customer. This figure is then multiplied by the total number of customers to arrive at the monthly recurring revenue figure. This way, you can keep track of which customer account is generating more revenue and critical to your business.
Depending on the business stage you are in and the growth plans you have envisaged for your business, you can choose from the many MRR calculations that can be deemed critical for your business.
