November 28, 2016
Your monthly recurring revenue (MRR) is one of the most important metrics for young startups—in fact, it’s one of the primary reasons so many founders get into software-as-a-service (SaaS). This recurring revenue helps tech founders ensure they’re always improving.
It’s seemingly simple to calculate, but according to a poll from ProfitWell, two of every five companies were including or excluding incorrect metrics in their MRR calculations.
The best definition of MRR—normalized monthly revenue from all the recurring items in a subscription (very common for SaaS subscription models).
If you’re going to increase your MRR, you’re going to have a baseline understanding of your true, current MRR.
For the most accurate picture, use the following equation:
Beginning of Month MRR + New Customers of Month MRR + Upgraded Customers of Month MRR + Downgraded Customers of Month MRR +
Churn of Month MRR = TRUE MRR
After discovering your true MRR, diving into optimizing it can be more difficult that you’d think. Gary Pica, President of TrueMethods, has done it before and attests to the difficulty of getting people to pay you every month:
"A lot of people think it's like 'Field of Dreams.' Build it, and they will come. But, getting people to pay you every month is not easy," Pica told CRN.
Here's a look at what you should be doing to increase your recurring revenue stream.
If you’re going to increase MRR from SaaS, you’ll need dedicated resources in place to do so effectively.
It’s common for startups to lean on their sales teams for billing, but it can be a difficult transition for them to take on MRR as well as selling.
It’s rarely successful—it’s better to take just one sales person and dedicate them to SaaS revenue that tries to spread the burden across a whole team.
For this to be successful, you’ll need a predictable number of targets. Successful teams can have close rates below 25%, but they're getting in front of lots of customers.
"If someone tells me their close ratio is 50, 60 or 70 percent, I know they don't have a sales engine built. You can't generate enough to build a business," Pica said. "As you get more leads, you need a more strict sales process to succeed."
Set a target that is concrete for your billing team. They need to know how much additional recurring revenue you want to add, and allows them to plan according. In general, $2,000 per month is a minimal goal across the organization.
To achieve this, you’ll need to know what type of pipeline you need, and how many appointments you need to set. If you don’t, it’s not a goal; it’s just a dream.
You can create more MRR by getting more qualified leads into the top of your sales funnel for a team to work. If you can optimize your process, so the cost of acquiring these leads is low, you can build a more efficient lead generation strategy.
You can increase your lead generation efforts, and therefore your MRR, in a variety of ways—direct and internet marketing, events and partnerships are just a few resources for new leads. You can start by tracking the moves of companies with the same target audience and start from there.
Your current customers are holding onto a lot of potential revenue that could increase your MRR. One of the most effective things you can do to get them to spend it is to upgrade their services with you—but this will only work if your product has value for them.
You can increase your SaaS value metric by clarifying exactly what you’re charging your customers for, and why your service is their best option.
Once you have convinced your customers to upgrade, you need to take steps to ensure you retain them. This naturally paves the way for a larger, more stable MRR for your company to rely on. Pay attention to your what your customers are saying, and improve your customer service efforts if you find you have a lot of churns.
Finally, reduce the amount it costs to acquire these customers. Your customer acquisition costs as a SaaS company are usually pretty low from the start, but you can always optimize them to be even cheaper if you need to increase your MRR in a pinch.
Just remember—customer acquisition costs aren’t a part of your MRR metric, they just allow you to be more efficient with it.
In general, increasing your MRR will provide you more stability and growth opportunities as a startup, and provide you with the confidence you need to make more hires, take more risks and build even more improvements to your products.
Optimizing your billing, lead generation, and customer nurturing processes to increase your monthly MRR and drive more revenue for your startup.