Calculate MRR-Term Subscriptions How do you calculate MRR for term subscriptions?

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How to calculate Monthly Recurring Revenue (MRR) for a Term Subscription Business


Monthly Recurring Revenue is neither a FASB nor a GAAP defined term, and therefor there are neither rules nor findings to help you define the calculations for the various MRR components needed to report on business momentum:
  • Monthly Recurring Revenue from renewals
  • Monthly Recurring Revenue from new sales
  • Monthly Recurring Revenue from upgrades
  • Monthly Recurring Revenue from losses or downgrades, commonly referred to as revenue churn

Whether you use a tool like SaaSOptics or a xls file, your report will look something like the image below. Variations might include a list of the customer names, or simply a summary without the detailed category line items.

MRR Bessemer Monthly Recurring Revenue
If you run your financials on QuickBooks or other packaged accounting system, you likely maintain your revenues on a spreadsheet. If your finance system has revenue recognition capability (Intacct, Netsuite, Softrax, SAP, Oracle, and others), you have likely become comfortable turning to that system or the data from that system for revenue calculations.

News Flash - you cannot get Monthly Recurring Revenue calculations from ANY financial reporting system!

Why?
  1. Finance systems don't typically differentiate revenues from new transactions versus those from renewal transactions
  2. Finance systems don't typically track lost revenues from cancelled contracts or non-renewed contracts
  3. Finance systems don't always make it easy to track or calculate net changes (net upgrade/net downgrade values)
  4. Finance systems that have revenue recognition functionality report GAAP revenue in actual calendar months, which as we will see, is not a MRR component
Points 1, 2, and 3 are self evident for most after an hour or two of report writing. What can consume the most time is reconciling the concept that none of the components of Monthly Recurring Revenue can really be gathered from your revenue recognition schedule. That is true whether your revenue system of record is xls or a true finance system.

Two issues shed light on the core problem using financial or "reported revenues":
  1. If you use a daily revenue recognition schedule, you will see a monthly 3%+ variation in revenues due simply to the number of days per month (1/30, 1/31, and 1/28)
  2. Unless you start all revenue recognition on the first day of the month, you will have partial month revenue streams

If you use a xls file for revenue calculations/reporting today, you probably won't have issue #1, but likely will have issue #2. If you have a sophisticated finance system, you could have both issues.

Monthly Recurring Revenue Measurement is largely a matter of exception management


A powerpoint presentation with simple formulas can lead you to believe that MRR calculations are easy. In fact, most are. As in most things in life and business, the exceptions are the time consumers. The higher the value your transactions, the more exceptions you are likely to experience, and therefor the more effort required to define the rules. Some practical examples shed further light on how in practice it can be complicated to calculate the various monthly recurring revenue components and why clear definitions are critical.

Example 1 - First and End of Month


Scenario: A new $120,000 annual contract starts on May 1, 2010 and ends of April 30, 2011. The contract does not renew in 2011.

Question: How much Monthly Recurring Revenue was added and when?
Answer: $10,000 in May 2010, specifically May 1, 2010

Question: How much Monthly Recurring Revenue was lost and when?
Answer: $10,000 was lost, but in what month? We would suggest May 2012, which is when the contract should have renewed (specifically May 1, 2011). Unless clearly defined, someone could easily decide to put the loss on April 30, 201, the last day of the term. But doing so, you both gain and lose $10K within one 12-month period.

Example 2 - Mid Month


Scenario: A new $120,000 annual contract starts on May 15, 2010 and ends of May 14, 2011. The contract does not renew in 2011.

Question: How much Monthly Recurring Revenue was added and when?
Answer: $10,000 in May 2010, specifically on May 15, 2010

Question: How much Monthly Recurring Revenue was lost and when?
Answer: $10,000 in May 2011, specifically on May 14, 2011

Example 3 - Gap


Scenario: A new $120,000 annual contract starts on May 15, 2010 and ends of May 14, 2011. After a gap due to contract negotiations, the contract renews for $120,000 on June 26, 2011 for a new term through June 25, 2012.

Question: How much new Monthly Recurring Revenue was added and when?
Answer: $10,000 on May 15, 2010.

Question: How much Monthly Recurring Revenue was renewed and when?
Answer: In fact, there is no "right answer," there is only how you decide to calculate it. Options include considering it a non-renewal in May 2011 and a renewal in June 2011, placing it into a bucket of "open renewals" in May, simply renewing it in June 2011, or renewing it effective May 15, 2011 at $9,230 MRR, effectively discounting it by considering it a 13 month term. Another option is to simply not worry about it. The not worry option is an extremely difficult one for finance people whose culture is routed in mathematical purity and the concept of tying. But, it is important to remember that MRR calculations are metrics that are used to report on progress, but most importantly to make business decisions. If the exception scenario is rare or is not material to the calculations, simply ignore it or footnote it!

Example 4 - Early Renewal Upgrade


Scenario: A new $120,000 annual contract starts on May 15, 2010 and ends of May 14, 2011. The customer orders an upgrade on December 31 that goes into affect January 15, with the new End date SEptember 18, 2014 and for a an additional $247,000.

Question: How much new Monthly Recurring Revenue was added and when?
Answer: That one is still easy - $10,000 on May 15, 2010.

Question: How much Monthly Recurring Revenue was renewed or upgrade and when?
Answer: It's up to you! Define the Monthly Recurring Revenue rules as best you can and record the transactions as consistently as possible. Be sure the rules are defined and described in English, so everyone on the team can understand them.

And remember, unless each contract has the same duration, you have to normalize the contracts somehow in order to perform the simple mathematical calculations of addition and subtraction.

See also,
Annual Recurring Revenue
Bessemer MRR Growth
Contracted Monthly Recurring Revenue
Committed Monthly Recurring Revenue
How to Calculate Monthly Recurring Revenue - Monthly Subscriptions