When calculating your monthly recurring revenue (MRR), the first thing ProfitWell does is break down bi-monthly, quarterly, semi-annual, and/or annual contracts into their monthly subscription value (i.e. a $120 Annual Subscription contributes $10 to your MRR). A few things to note:
- We don't include payments that aren’t part of a subscription.
These aren’t “recurring”, so they don’t belong in Monthly “Recurring” Revenue. You don’t expect to receive them on a regular basis, which means that including them in your MRR calculations will inflate your revenue expectations and skew your financial model.
- We don't deduct transaction fees and delinquent charges.
Delinquent charges are in a gray area between churn and active, especially if you typically quickly recover any failed credit card charges. The problem here though is in an end of month (EOM) calculation schema a delinquent charge is technically gone because you didn’t collect the subscription from the customer. What you should instead do with your delinquent charges is to separate them out into their own category. This type of grouping allows you to accurately measure and decrease the amount of revenue you lose each month due to failed or expired credit cards.
Additionally, including transaction fees doesn’t give you enough credit and hides a potential room for optimization. Sure, you’ll never get that transaction fee to 0%, but you can easily switch billing systems, spin up your own solution, etc to optimize costs. A great concept to keep in mind is that any expense that can be optimized should be labeled as an expense and not immediately taken out of your MRR. With that logic, you should theoretically take out all of your customer acquisition cost (CAC).
- Trialing customers (or any customer that hasn't yet paid you) are not included on your counts.
Perhaps the most egregious SaaS sin is including trialers and their expected subscription value before they actually convert to being a customer. Doing this essentially gives you a consistently high list of “net new” customers and “churned” customers because we all know 100% of trialers don’t convert.
- While some exceptions apply, we typically don’t deduct refunds from your MRR.
For more information check out The Complete SaaS guide to calculating and optimizing MRR/ARR and You're Probably Calculating Your SaaS MRR incorrectly.