You Are Calculating MRR Wrong Way
From the conversations I had with the startups around me, I have realised that many of them do know about the important metrics such as LTV, CAC and MRR. But they are not interpreting these metrics correctly and this can lead to misleading information about your metrics. In this article, I will write about some of the mistakes I have seen when calculating MRR. I will write about other metrics in my following articles.
P.S: I have not committed any of the mistakes here, I just know some stuff, don’t think that It was me, who did all of the mistakes mentioned here :)
MRR
Monthly Recurring Revenue is a very important metric for every SaaS business. Once your business acquires a new customer it will provide a recurring revenue for you and this will be recorded under your MRR. This metric is different from the traditional revenue because once your customers make a purchase you don’t have to be worried about making another sale to him/her again. This customer will provide a steady monthly income (recurring) without the need of making a continuous sale. In this scenario, you have to be concerned about things like retention and churn.
Calculating the MRR is very straightforward. I will give you a very basic example of calculating it rather than giving you a theory behind (You can ask the theory behind it to your Mr Startup Professor). Let’s say that you have 2 subscription plans. One is starter edition which costs $10 per month and other one is pro, which costs 20$ per month. You have 20 customers with starter plan and 10 customers with pro plan so your MRR would be (20*10) + (10*20)= $400.
I know the calculation above seems very simple and you are probably wondering, why the heck this guy is saying this calculation could be daunting and misleading if all you need is simple math. Guys, I will stop you there and tell you that, as your business evolves and you dig deeper into MRR, it gets complicated and if you calculate it wrong you will mislead yourself only to face with truth later.
Show Me The Mistakes!!
Okay, this is the part where I will write about some of the mistakes I have seen. It is critical to learning from these mistakes because if you get MRR wrong you will be misled about the momentum of your business and when you realize that you were misled, it could be too late. All of the SaaS metrics should be calculated and reported correctly otherwise it could lead to a big problem. Remember the problem Netflix had back in 2003? The company reported that churn rate reached to all-time lows while it was found out that actual churn rate has actually increased. Wrong calculations could lead to misleading information just like in the Netflix example. It is not just MRR that is being calculated wrong, In my next article, I will talk about other metrics which are calculated wrong and leading to a false information.
1) Quarterly, Semi-annual and Annual Subscriptions Are Valued At Full Price Under the MRR
It is great if you successfully accomplished to sell long-term subscriptions to your customers. This will allow a steady income and reduce the risk of churn compared to a monthly subscription with cancel option. These long-term subscriptions should be added to your MRR but you shouldn’t add the full amount to your monthly revenue. Even if you received the full payment upfront, this amount should be divided (months or weeks) and then added to your MRR.
2) One Off Payments Are Good For Cashflow But Not For MRR
Let’s say that you did a partnership and received a one-time payment of x amount. Well, this is perfect news, your bottom line will love it and cash flow will cheer. But this one-time payment should not go under your MRR. Remember guys MRR stands for monthly recurring revenue anything that is not recurring is not welcomed in MRR club. Your dear one-time payments should join the club Cash Flow.
3) Discounts Don’t Count
Ah discounts, we all love it don’t we? But I don’t like it when you don’t include them on your MRR calculations. I have seen some people that are not including discounts on their calculations, I don’t know if it’s because they love the discounts or simply they forget. If your subscription costs $1000 per month and you are giving %50 early adopter discount, your MRR is $500, not $1000. Make sure that you make necessary adjustments when doing calculations. If your target was $1000 per month, I am sorry that you will be disappointed to see $500 on your MRR (Unless the actual subscription fee was $500 but you bumped up the price to $1000, to look like you gave a discount, yeah in this case discount doesn’t count)
4) Trial Customers Are Not CUSTOMERS
Hands up, if you expect trial customers to convert to long-term customers and include trial people on your MRR projections. By the way, there is no typo on this sub-headline, I used uppercase on purpose to highlight the importance of this mistake. To sum up, don’t include trial people to your MRR calculations they don’t convert (They will probably use another email to get a new trial, hands up if you this as well).
5) MRR Is Not An Accounting Jargon
I am sure you folks love accounting and that’s why you treat MRR as an accounting figure. I had to love accounting because I come from Investment Banking background, but I am sure you guys are not a big fan of it, so please don’t accept MRR as an accounting figure. If you do that you will be treating MRR as a number to get insight on your financials with your accountant buddy. This is not the correct use case and you will not get anywhere with that. You need to use this metric to get insight into your business by tracking your growth and tracking where is this revenue growth coming from?
Conclusion
I hope this article was fun and helpful. Understanding metrics is very important to analyze where your company is going. Not using them correctly could lead to misleading information that could give you a headache later on. It can even cost you your business and you don’t want that to happen. I wanted to share some of the mistakes I have seen on this topic, so you guys can learn from the mistakes of others. If you can share some of the mistakes you have seen, so that I would learn from them and I don’t featured on someone else’s blog post with a title “A Guy Wrote Article On MRR Mistakes Made A Big Mistake That Cost Him Lose His Job”.
