Why Monthly Recurring Revenue is the Most Important Metric

Monthly Recurring Revenue (MRR) is the most important metric of any subscription business. With the MRR model, once you acquire a new customer, you get recurring revenue every month. This means that you don’t have to worry about counting the number of hours you spend working for a client or making more sales every month.

How to calculate MRR?

The best way to calculate MRR is to simply sum the monthly fee paid by every single paying customer of your installed base. So let’s say you have Customer A paying $200/monthly and Customer B paying $100/monthly. Your MRR would be $300.

MRR = SUM(Paying customers monthly fee)

How MRR can help your business

Monthly recurring revenue has many major business benefits. While it is not easy to build up a large client base, building your business on the back of MRR is worth the effort. The following are a few of the most important benefits:

1. Predictability

The recurring monthly revenue model provides an easy way for your business to forecast its future cash flows and budget. The old fashioned time-based model is not predictable, as you can only ever look backward. MRR allows you to control and plan for your practice growth.

2. It's built to scale

The recurring monthly revenue model means that you automatically bill your clients each month. You won’t waste time filling out timesheets or calculating the number of hours worked spent per client. This will bring your administrative costs right down. Setting your clients up on a fixed-fee model involves having a value conversation with them, leading to a mutual agreement that the value provided is greater than the fee. Learn more about MRR.

3. Leverage unit economics

The most important metrics you need to keep in mind when building a business with a monthly recurring revenue model, are the cost per acquisition of each client and their lifetime value. Once you have worked out how much it costs your business to acquire a client, and how much value you get from the client, you will have a clear business model for running your business.

Over time, you can work to reduce your average cost of acquisition by lowering your cost of acquisition while at the same time, increasing the average revenue per client/Customer Lifetime Value. One way to do this is to upsell new services to your existing client base. As you may have heard before, it's much cheaper to sell more services to existing clients than it is to try and bring on a new customer.

4. Increase the potential for collaboration

Companies using the recurring revenue model have greater interaction with their clients as they deliver value on a monthly basis (even if it’s just the software). This enables them to keep their clients happy and involved.

Takeaways

Moving from time-based billing to fixed fee billing creates numerous efficiencies for your practice. A business should charge the value it creates for a client, not based on the number of hours spent working. This is a better way to think about doing business. Getting your clients on board with this theory will provide you with predictability, improve your unit economics, and help you scale your business.