When it comes to growing your SaaS business, securing recurring revenue is the name of the game.
After all, monthly recurring revenue (MRR) is what makes the SaaS model so attractive in the first place - and without subscribers, you don’t have a business.
Since MRR is so critical to the success of your SaaS business, let’s take a closer look at how to calculate this metric in the context of SaaS sales, as well as how you can optimize your MRR for faster growth and higher profits.
What is MRR?
Monthly recurring revenue (MRR) is a measure of how much your business is guaranteed to earn over the course of a single month. It tells you how much revenue you have coming in reliably month after month, due to recurring revenue sources like customer subscriptions.
But more importantly, MRR is the key to measuring SaaS sales, forecasting, and building a sustainable business.
Different Methods for Calculating MRR for SaaS sales
The simplest way to calculate your MRR is to add up the value of paid subscriptions from each of your customers. So, if you have three customers paying $75/month and one paying $100/month, your MRR would be $325.
This method is quick and easy, but only when your customer base is relatively small. The more customers you have, the more tedious is becomes to calculate MRR by adding all of them up individually.
What you can do instead is take your total number of paying customers and multiply by the average monthly recurring revenue per user (ARPU). If we use the same numbers from the example above, your ARPU would be $81.25. When you multiply that by the total number of subscribers (4), you get an MRR of $325.
($75 + $75 + $75 + $100) / 4 customers = $81.25 ARPU
$81.25 * 4 customers = $325 MRR
How to Calculate True MRR
Now, to get your true MRR, there’s a slightly more complex equation you can use. This looks at changes to your revenue in more detail by factoring in not only your recurring income, but also changes to any existing accounts (upgrades and downgrades) and any revenue lost due to customer churn.
These numbers all get plugged in to the following calculation:
Baseline MRR + Gained MRR – Lost MRR = True MRR
In this equation, your baseline is the amount of MRR you start with at the beginning of the month, gained MRR is any added income from new customers and upgraded accounts during the month, and lost MRR is revenue lost due to churn or downgraded accounts.
Here’s a more detailed breakdown to help you visualize the calculation:
6 Strategies to Increase Your SaaS MRR
Optimizing your MRR is key to future-proofing your business against potential threats and challenges. The more recurring revenue you can secure month-over-month, the higher your chances of long-term success and continued growth.
If you want to maximize MRR from SaaS sales, here are a few proven strategies you can use.
1. Secure New Business
This might seem obvious, but getting new customers is one of the best ways to bump up your monthly recurring revenue. The more people or businesses you have paying for your software each month, the higher your MRR grows.
Unfortunately, acquiring more customers is easier said than done. So, what are some actionable steps you can take to work towards this?
- Know who your best customers are and where they come from. If you haven’t already, spend some time creating an ideal customer profile.
- Refine your messaging to highlight value added.
- Work with marketing to target more qualified leads who are most likely to turn into customers.
- Keep a close eye on your sales pipeline so you can identify and patch potential leaks.
2. Cut Back on Your CAC
If you can reduce your customer acquisition cost (CAC), you’ll start every new customer relationship with more money in your pocket. This can be achieved by making adjustments to a number of factors in your sales process, including focusing on more qualified leads, increasing sales velocity, and optimizing your conversion rate.
One of the best ways to reduce CAC is to shorten your sales cycle, because the less time it takes to close a single deal, the more sales you can make. For instance, if you notice any bottlenecks in your pipeline, find a way to streamline the affected stage. You should also pause or remove stalled deals to avoid clogging your pipeline.
3. Strengthen Customer Loyalty for Better Retention
If you can keep your current customers around for the long haul, your MRR will benefit. That’s because greater customer loyalty means better customer retention – which, most importantly in the context of SaaS sales, means less customer churn.
The longer someone remains a customer, the higher their customer lifetime value (CLV) will be. If you can both reduce your CAC and increase CLV, you’ve got the magic formula for growing MRR.
4. Upsell to Existing Customers
Existing customers are often willing to spend more than new customers. This makes sense, since your current customers already trust your brand, already know your software, and already know that your offering provides real value.
So, if you’re a SaaS business that wants to grow MRR by increasing sales to current customers, how can you pull it off? There are two approaches you can take: raising your fees or providing more value (or both).
Our recommendation is to find new ways to add value to your existing customer base, rather than simply upping your prices. For example, you could introduce a higher subscription tier that provides additional storage or support to customers. This allows you to provide more value and bring in more recurring revenue from your existing customer base.
5. Focus on Upmarket Sales
If your software is geared towards small to medium sized businesses, you might hit a wall in terms of potential profitability. SMBs tend to have more restrictive budgets and smaller needs for custom solutions.
An option to increase MRR in this situation is to move upmarket. Think about what you can provide to enterprise-level organizations and offer a customized version of your standard solution.
If you’re not sure whether you’re ready to tackle enterprise sales, read our Enterprise Sales Guide for Startups first.
6. Offer an Annual Plan
In most cases, annual plans are a slightly discounted version of the monthly plan. The reduced total cost is offered in exchange for an upfront payment and the security of a year-long customer. Annual plans are a simple, effective way to amp up sales from your current target market – whether it’s individuals, SMBs, or enterprise sales.
The Right Tools Can Help You Build a Sustainable SaaS Business
Boosting your MRR today can help secure your company’s success for years to come. To help you achieve your revenue goals, it’s important to track and measure your progress at every step. A CRM like Propeller can help you measure what matters most to your business.
Want to see what a powerful CRM can do for yourself? Start using Propeller for free today.