In this episode of Pain in the GAAP, we dive into MRR, or monthly recurring revenue — a metric critical to SaaS businesses that can be a little tricky if you deal with real customers and not just spreadsheets.
We talk about how MRR is a useful metric for businesses to understand their future prospects as well as provide a business’ board and investors information to determine valuations.
The composition of customers that make up a company’s MRR provides important details about the overall health of the company:
- New customers — brand new contracts, the term (12-36 month), the percentage of recurring revenue within the overall booking
- Expansion within customers — existing customers adopting additional or upgraded recurring services
- Contraction within customers — existing customers reducing the services licensed
- Churn of customers — lost customers during a certain period
Jason explains an interesting segmentation strategy by also thinking about reactivation MRR.
If you understand that certain segments of the your customer base are more transactional in nature, you can also include reactivation MRR (or prior customers that reactivate your service). Modeling this component of MRR can help you more accurately predict future revenue & cash flow and smooth lumpiness from churn associated with certain segments of your customer base.