The Importance of MRR (Monthly Recurring Revenue)

Five23 | The Importance of MRR

The Importance of MRR (Monthly Recurring Revenue)

If a startup wishes to become successful and profitable, they must be able to realize some form of revenue.

For the majority of service-based startups, this revenue comes from a subscription based model. When customers are paying for a service on a monthly basis, the revenue received by the company can be classified as Monthly Recurring Revenue (MRR).

MRR is used in a myriad of ways for analysis, but it is generally used to give an investor insight into the overall health of the startup. This level of health is determined by combining a few factors MRR accurate predicts. Such as:

Revenue Momentum
Customer Lifetime Value
User Growth
Churn Rate
Average Selling Price Trends

When each one of these items is calculated against the MRR of the company, one can have a clear view of the company and its projected revenue growth over time. This insight of the company proves invaluable for many investors, and may be the difference in receiving an investment or not.

To better secure the MRR of a company, the startup must take actions to create reasonable insurance the revenue will occur at the set monthly interval. This can be done in a few ways, but generally, is handled by automated payments and/or a binding legal contract. Having a contract ensures the payment will be made until a specific date or an indefinite amount of time. While there is always a certain percent of churn (users canceling their subscription to the service), the overwhelming majority of users will not break their contract.

When weighed in the balance, the amount of MRR the startup receives is invaluable to their success as a subscription based company. While this metric doesn’t fall into typical accounting practices, it is important to know this metric when dealing with investors and raising venture capital.