MRR

What is MRR?

MRR (monthly recurring revenue) is the sum of the monthly fees owed to a company at month end under ongoing customer contracts billed on a recurring basis, such as subscriptions. Contracts with a longer billing period are converted to one month; one-off income is not included. Multiplied by twelve, MRR gives ARR.

MRR is the most important management metric in the monthly reporting of companies with a subscription model. Especially with contracts that can be cancelled monthly and many smaller customers, management tracks it month by month, together with the growth rate against the previous month (MoM growth). Investors receive it in the regular reports, and in a funding round or a sale it is requested as a monthly time series covering several years. MRR is not regulated by law; the company itself decides which fees are included. The identically abbreviated term from online marketing, Master Resell Rights, meaning resale rights to digital products, is not meant here.

Calculating MRR: conversion to a month

Formula: MRR = sum of the recurring fees of all contracts running at month end, converted to one month = number of paying customers × average monthly revenue per customer

For each contract running at month end, the recurring fee, excluding VAT, is converted to one month:

• Monthly billing: the agreed monthly fee
• Quarterly billing: one third of the quarterly fee
• Annual billing: one twelfth of the annual fee, even if the whole amount is paid in advance
• Multi-year contracts: one twelfth of the fee for the current contract year

The fee actually agreed after discounts is to be used; for a temporary introductory discount, this means the discounted price for its duration. The end date of the discount is recorded, because MRR rises when it expires without any further action. Contracts in foreign currencies are commonly converted at a fixed rate so that exchange rate fluctuations do not appear as growth or attrition.

What does not appear in MRR

Fees for set-up, consulting, training or data migration are not included in MRR, even if the bookkeeping spreads them over the contract term. Usage-based fees above a contractual minimum commitment are kept separately as variable revenue. Only the committed minimum is recurring in the narrower sense; the rest fluctuates with the customer's consumption.

The MRR bridge: new business, expansion and attrition

The change in MRR from one month to the next is broken down into five movements:

• New MRR: contracts with new customers whose paid term begins in the month
• Expansion: additional revenue from existing customers through additional users, modules or price adjustments
• Reactivation: former customers who sign again after a cancellation; some companies count them as new MRR
• Contraction: reduced revenue from existing customers who reduce users or modules
• Attrition: contracts that end through cancellation in the month

The sum of these movements is net new MRR. Only the breakdown shows whether an increase comes from a growing customer base or whether high new business masks ongoing losses. Signed contracts with a later start and cancellations that have been given but are not yet effective belong in a side calculation that makes the position in the coming months foreseeable. Attrition is additionally reported as a rate, measured against MRR at the beginning of the month (churn rate).

MRR, monthly closing and revenue

MRR and the monthly revenue from the monthly closing or the business management evaluation (BWA, the accounting department's monthly management report) are different figures. Revenue includes one-off income and variable usage fees, and it reflects contract changes within the month pro rata. MRR, by contrast, is the position on the last day of the month.

The difference becomes clear with annual invoices. Under the German Commercial Code (Handelsgesetzbuch, HGB), revenue arises only on performance, so a prepaid annual fee is recognised as revenue over twelve months. The part not yet earned appears on the balance sheet date as a deferred income item (passiver Rechnungsabgrenzungsposten), an item for money already received for which the counter-performance is still outstanding. If no accrual is made during the year, the BWA shows the full annual amount as revenue in the invoicing month, and the accrual follows only with the annual financial statements. For the reconciliation from MRR to the bookkeeping, a monthly accrual of prepayments is therefore almost indispensable.

The monthly time series in valuation and due diligence

Revenue multiples usually start from ARR, which is derived from the MRR of the last month (revenue multiple). The valuation therefore hangs on a single monthly value. Investors accordingly check whether this value is carried by an exceptional month, such as the start of a large customer, and whether the course of the previous months supports it. Steady growth with low attrition is valued more highly than an erratic course with the same end position.

In due diligence, the MRR time series is reconciled month by month with the billing system, the outgoing invoices and the incoming payments. The accounts receivable accounting, that is, the bookkeeping of receivables from customers, shows whether customers that appear in MRR actually pay. Samples from the customer contracts verify prices, terms and cancellations. Particular attention is paid to months in which the calculation method was changed; for these periods, the reviewers require the earlier time series under the new method.

Worked example: MRR with an annual contract and a set-up fee

A software provider for corporate customers has MRR of EUR 240,500 at the end of November. In December the following movements arise:

• MRR at 30 November: EUR 240,500
• plus new MRR: EUR 8,000, including an annual contract of EUR 36,000 (list price EUR 40,000 less a 10% discount) at EUR 3,000 a month
• plus expansion: EUR 2,500
• plus reactivation: EUR 500
• minus contraction: EUR 500
• minus attrition: EUR 1,000
• MRR at 31 December: 240,500 + 8,000 + 2,500 + 500 minus 500 minus 1,000 = EUR 250,000
• Net new MRR: 250,000 minus 240,500 = EUR 9,500, growth of about 4% against the previous month
• ARR at 31 December: 250,000 × 12 = EUR 3.0 million

The new annual customer pays EUR 36,000 in advance on 1 December and an additional EUR 12,000 for set-up. Only EUR 3,000 of this appears in MRR; calculated at the list price, it would be about EUR 3,333. Under commercial law, EUR 3,000 of subscription revenue falls to December, and the remaining EUR 33,000 appears on the balance sheet at 31 December as a deferred income item. The set-up fee is recognised as revenue either on completion of the set-up or spread over the term, depending on its classification; in no case does it appear in MRR. If the company were to count the entire invoice amount of EUR 48,000 as December MRR, MRR would be EUR 45,000 too high. The extrapolated ARR would rise by EUR 540,000, although the contract contributes only EUR 36,000 a year.

Distinction: MRR, ARR, ARPA and run rate

• ARR: MRR times twelve. ARR serves as the reference value for valuation and year-on-year comparison, MRR for monthly management.
• ARPA: MRR divided by the number of paying customers. It shows how recurring revenue is distributed across the customer base.
• Run rate: the total revenue of a month times twelve, including one-off income and variable fees. Because it mixes recurring and one-off revenue, it is less informative for valuing a subscription business.
• Monthly revenue: the booked figure according to the bookkeeping, accrued pro rata and including all types of revenue.

Common mistakes

• Invoice amount instead of monthly value. If an annual invoice is counted in full as MRR in the invoicing month, a spike arises which, extrapolated, multiplies ARR. The correct approach is one twelfth of the annual fee in every month of the term.
• One-off income in MRR. Set-up and consulting raise the MRR of a month and distort the growth rate and ARR alike.
• VAT included. MRR is determined excluding VAT. Gross amounts overstate it by the tax rate and do not match revenue.
• Payment defaults not adjusted. Customers who permanently do not pay or have stopped using the product often remain in MRR until the contract formally ends. A fixed rule on when such contracts are removed prevents overstated values.
• Silent changes of method. If the calculation is changed without adjusting the previous months, a jump arises that looks like growth. In due diligence it comes to light in the reconciliation with the bookkeeping.

Frequently asked questions

What is the difference between MRR and ARR?

MRR measures the recurring revenue of a month, ARR that of a year: ARR = MRR × 12. Both rest on the same delimitation, so an error in MRR carries through into ARR by a factor of twelve.

Does a customer in the free trial phase count towards MRR?

No. A customer enters MRR only when the paid term begins. Trial phases and free pilots are managed as a pre-stage in sales, not as revenue.

Do payment fees or credit notes reduce MRR?

Payment fees do not; permanent price reductions do. Fees of payment service providers are costs and leave revenue unchanged. A credit note that permanently lowers the price reduces MRR from the month in which it applies. One-off credit notes, for example because of a service disruption, are recorded by the bookkeeping as revenue deductions; MRR is unaffected.

How are contracts with per-user prices calculated?

With the number of users contractually licensed at month end, times the agreed price per user. If users are added, that is expansion; if users drop out, that is contraction.

What period of MRR data is required in due diligence?

As a rule of thumb, the monthly values of the last 2 to 3 years, each with the bridge and the reconciliation to the bookkeeping. For younger companies, the entire period since the first paying customer is requested.

The Roemer Capital view

Where Roemer Capital takes over the finance function for a period as fractional CFO, the MRR bridge is set up as a fixed component of the monthly closing: position at month end, five movements, reconciliation to the booked revenue. The bridge is built from the billing system and reconciled with the bookkeeping, rather than reconstructed afterwards from presentations.

Before a funding round, this provides a gap-free time series that investors can recalculate themselves. At the same time it shows how growth and attrition change the liquidity requirement. From this Roemer Capital derives the point at which to start the process, when 12 to 18 months of runway should still be available, that is, liquidity for that period.