6 mistakes companies make when calculating MRR

Metrics 101

Monthly Recurring Revenue (MRR), while theoretically a simple metric to calculate, does have some intricacies and edge cases that can trip entrepreneurs up a bit.

Here are 6 things to look out for and keep in mind as you dig in to your company’s recurring revenue.

Incorrectly accounting for non-monthly billing intervals

MRR is, by definition, a “monthly” figure. But obviously “monthly” isn’t the only way to bill a customer. The most common additional billing interval is annual, but quarterly and even weekly billing are common as well.

So how do you properly include those non-monthly intervals in to a monthly recurring revenue figure? You normalize it.

For example, if you bill someone $1,200 annually, you simply divide that number by 12, meaning that $1,200/year customer shows up as $100/mo in your MRR figure.

What about weekly? Well, there are 52 weeks in a year, so you’d divided 52 by 12, which gives you 4.33 as a multiplier. So if you billed $10 per week, you’d say $10 * 4.33 for $43.30 in MRR.

Including non-recurring revenue

Monthly Recurring Revenue is meant to be used as a figure to measure growth and future health of your company. If you start including things like one-time setup fees or even monthly installments (“3 easy payments of $19.99”) then you’re artificially inflating your MRR figure and generally setting yourself up for a bit let down.

If a payment doesn’t automatically recur in perpetuity until a customer decides to stop the service, then it shouldn’t be included in your MRR figure.

Treating MRR as an accounting figure

MRR is, in no scenario, a figure that should be used for accounting or tax purposes. It’s a business insights figure, not an accounting figure. When you want to start talking accounting terms and figures, you’ll be interested in Bookings, Billings and Deferred Revenue. But MRR is not a number you’ll be using with your accountant.

Monthly Recurring Revenue is meant to track growth trends and give you insights in to where revenue growth is coming from.

Including leads and trials

“Oh cool, someone just started a trial on a $500/mo plan! Lets throw them in our MRR figure!” Nope! Don’t do that. Yes, a certainly percentage of trials and leads will convert and become part of your MRR. And yes, your conversion rate may very well be extremely consistent and reliable, but you’re talking about a different metric.

You aren’t helping anyone by artificially inflating your MRR figure with customers who might start paying you.

Ignoring MRR components

Your MRR is actually made up of lots of different factors!

  • New MRR — MRR from new customers
  • Expansion MRR — MRR from existing customers (upgrades)
  • Reactivation MRR — MRR from previous customers
  • Contraction MRR — Lost MRR from existing customers (downgrades)
  • Churned MRR — Lost MRR from canceled customers

Each type of MRR tells a story and gives you insights in to the “why”. If you’re only looking at the top level MRR figure, you could very well be missing huge red flags, such as high churn that is currently masked by high growth (but definitely won’t be forever).

Ignoring coupons & discounts

Let’s have a quick heart-to-heart. Do you really think you should be including the full value of a $250/mo customer if you’re giving them a 50%-off coupon? No. You should not be.

Maybe that coupon is just temporary (i.e. 50% off for 3 months), or maybe it’s a permanent discount. The fact is, you’re reducing the value and the revenue from that customer is a real and tangible way that you really need to take in to consideration when calculating MRR. Otherwise you’re artificially inflating your MRR figure.

Yes, this makes calculating MRR more complicated and harder to do, which is why using a tool like Baremetrics (which automatically takes all of these types of edge-cases and scenarios in to account) quickly becomes a no-brainer.

Are you making these mistakes?

If you’re making these mistakes, or if you need help with any of your metrics, we’d love to chat and help out! Here at Baremetrics we’ve worked with thousands of companies and account for nearly every edge case imaginable to make sure you get the most accurate and useful MRR possible…all with nearly zero work on your part.


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