How To Increase Monthly Recurring Revenue: A Beginners Guide
As a business owner, you know you have many numbers to keep up with and evaluate that help you make decisions for your company. Your MRR is one of them. Understanding MMR is pretty simple, but utilizing what you know about your business, MRR can significantly impact your profits and how you structure sales and marketing.
What is MRR?
MMR, or Monthly Recurring Revenue, tells you how much income your business generates monthly. MRR gives you an idea of what you can expect to earn consistently over time. Knowing your MRR enables you to make critical decisions for business planning. In addition, this metric gives you a clear picture of how much money you have coming in each month that can be reinvested to build your business.
Types of MRR
MRR can be organized into a few different categories. By evaluating specific types of MRR, you can better determine exactly how your revenue is growing and what changes you need to make to increase it even more.
New MRR
New MRR is monthly recurring revenue that is generated from new customers. The New MRR metric helps determine if acquiring new customers is financially beneficial or costs more than you think. Looking at your New MRR and evaluating it against your total MRR can give you an idea if you need to adjust your budget, so your new customers don’t disrupt your profits.
New MRR also allows you to see trends in your sales and marketing success. If New MRR trends are upward, you know your acquisitions teams are doing something right.
Expansion MRR
When existing customers bring in more revenue than your base MRR, you see Expansion MRR. Expansion MRR typically comes from a package or plan upgrade or a cross-sell.
Because Expansion MRR comes from existing customers, tracking this metric allows you to study trends in sales and tweak your sales strategies. It’s more cost-effective to earn Expansion MRR than acquire a new customer, so you should closely monitor how effectively your team can upsell or cross-sell to your current customer base.
Churn MMR
Churn MRR is the revenue you’ve lost due to customers canceling or downgrading. Therefore, tracking your Churn MRR against New and Expansion MRRs is essential. For example, let’s say your business experiences a $2,000 growth in one month. That’s great at first glance. But you’re missing the big picture if you aren’t considering a Churn MRR of $1,000. You’re losing much revenue, even if your total MRR has technically grown.
How to calculate MRR?
Calculating your MRR is pretty simple. First, determine your ARPA (Average Revenue Per Account.) You find this value by dividing the total revenue from all customers by the number of customers you have that month.
Now that you’ve got your ARPA multiply that by your total number of customers. So, let’s say you’ve got 100 customers, and each customer pays an average of $100 monthly. So your MRR comes to $1,000.
Five tips to increase MRR
Once you’ve worked out your MRR, you might find it’s less than you thought. Or maybe it’s even stagnant. Below are five tips to help you increase MRR and customer retention.
Charge More
Too many businesses are underpricing themselves to beat out the competition. In reality, not charging enough for your products or services puts you in a position where you’ve got to work harder for less income. Charge more for what you offer. Customers equate price with value. You want to charge enough, so your effort is worthwhile. But by setting more, you also communicate to the customer that your product is worth more than competing businesses charging less.
Upsell
One of the most cost-effective ways to increase MRR is acquiring more revenue from your existing customer base. If you can increase the value of what you’re offering to your users, then charge for it. Offering upgrades, bundling or add-ons makes their lives easier. And people value ease and efficiency—so much that they’ll pay for it.
Get Rid of Unlimited
You shouldn’t be offering your services for free. Unlimited storage, unlimited users, unlimited anything: it costs you. Instead, offer tiered plans that increase in price as the value of your offer increases. Customers won’t hesitate to pay for products and services that provide value.
Offer Prepayment Options
Prepayment plans provide one of the sales game’s most effective customer retention strategies. If your customers are on monthly contracts, there’s no reason for them to stay with you longer than through the next billing period. Annual payment plans improve your MRR and customer retention, and they can yield a higher net gain over time—even if you offer a discount.
Eliminate Free Plans
When customers see the word “free,” it catches their eye. But once you offer something at no cost to them, there’s a minimal incentive for your customers to pay anything. As noted above, users consider paid products more valuable than free ones. But there are other issues with offering your plans for free. In general, free users will stay free, and your resources will be spent on customers who aren’t aren’t contributing to your growth. So eliminate free plans and focus on retaining paid customers by providing the support and products they value.
Conclusion
Working out your MRR according to its specific type lets you track crucial data that helps you shape your sales, acquisition, and retention strategies. Knowing your MRR enables you to determine if sales and marketing efforts are working. It also shows you specific strengths and opportunities to grow. Knowing your MRR allows you to budget and plan for your business moving forward. Determining your MRR is quite simple, and the data you get from calculating your MRR enables you to make sound decisions that help your business grow.
