What is Monthly Recurring Revenue (MRR)?

Monthly Recurring Revenue (MRR) is the income that a company can reliably anticipate every 30 days. It serves as the standard measure of predictable revenue for subscription-based businesses.

For a founder, MRR acts as a baseline for stability. In a traditional service business or retail shop, you effectively start every month with zero dollars in revenue and have to sell your way to profitability. In a subscription model, you start the month with your MRR minus whatever customers you lose.

This predictability changes how you hire, how you spend on marketing, and how you plan product development. It allows you to forecast the future with a higher degree of accuracy.

The calculation seems simple on the surface. You take the number of paying customers and multiply it by the average amount they pay per month.

However, founders frequently make mistakes here by including the wrong types of revenue. To get an accurate number, you must follow specific rules.

• Exclude one-time fees: Implementation fees, setup costs, or consulting hours are not recurring. Including them inflates your numbers and gives you a false sense of security.
• Normalize annual contracts: If a customer pays $1,200 upfront for a year, you do not count that as $1,200 in MRR for that month. You divide it by 12 and recognize $100 in MRR.
• Include discounts: If a customer is on a 50% off plan for three months, their MRR is the discounted price, not the full price.

Tracking the total number is helpful, but understanding how that number moves is more important. This is typically analyzed through Net New MRR.

This metric breaks down the revenue into three specific behaviors.

• New MRR: Revenue from brand new customers gained this month.
• Expansion MRR: Revenue gained from existing customers upgrading their plans or buying add-ons.
• Churned MRR: Revenue lost from customers cancelling or downgrading.

If your Expansion MRR exceeds your Churned MRR, you have achieved negative churn. This means your business can grow even if you do not acquire a single new customer. This is a strong indicator of product-market fit.

It is critical to understand that MRR is not the same as cash in the bank.

If you sign ten customers to annual plans, your cash flow will look high immediately because you collected the money upfront. However, your MRR remains the monthly equivalent. Conversely, you might have high MRR but poor cash flow if customers are slow to pay invoices.

Founders often confuse these two concepts. You can run out of cash while having a growing MRR graph.

As you look at your revenue streams, there are unknowns you have to grapple with.

Is your MRR growth masking a retention problem? You might be adding new customers fast enough to hide the fact that older customers are leaving.

Are you optimizing for high MRR numbers or high gross margin? A million dollars in MRR is less impressive if it costs nine hundred thousand to service that revenue.

The metric provides data, but it does not provide context. You have to look at the operational reality behind the number to know if the business is actually healthy.