MRR: A Simple yet Tricky SaaS Metric Crucial For Your Business
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“Happiness is the longing for repetition,” said the world-known Czech novelist Milan Kundera in one of his novels. And if you wonder what the relation between this phrase and the article’s title is, I would give you a hint - it’s in the word “repetition.” In business, the same as in life, we value constancy because it gives us a feeling of stability and reduces uncertainty stress. The predictable monthly revenue is a foundation of all business growth-related plans.
We at Eleken think that it is a company’s lifeblood and health measurement. The revenue calculation seems as easy as pie yet can show you a distorted picture when performed incorrectly.
If you got excited to know more about MRR metrics, keep reading this article and learn why MRR is important, how to properly calculate it, and what are ways to increase your monthly revenue.
What does MRR stand for?
Let’s start with a quick recap of what MRR is.
MRR means monthly recurring revenue a SaaS company expects to receive each consequent month. Given most B2B SaaS businesses employ a subscription model, as long as their customers stay with a company and pay a fixed amount of money each month, the company can predict its monthly revenue. If customer retention rate is high and churn rate is not significantly deviating from month to month, MRR can be used to forecast the company’s average growth rate in a long perspective. By the way, you can learn more about SaaS churn rate and average SaaS growth rate in devoted articles, elaborating on these crucial business metrics.
Based on the above, it becomes obvious that MRR business metric is the main indicator of a healthy cash flow for subscription-based businesses. For the in-depth analysis, you can separate specific MRR types and get a more detailed understanding of what your total revenue is built from. We’ll talk about this point in a couple of paragraphs.
Why is MRR important for SaaS
Monthly recurring revenue underlies:
- Business stability - predictable income gives freedom to build ambitious plans and ensures they have high chances to become real. Being able to forecast future earnings, it becomes easier to plan the expenses and create a company’s “safety bag” for just-in-case.
- Company growth - based on current MRR, a SaaS business can estimate long-term income growth and create an actionable revenue expansion plan.
- Investor valuation - for an early-stage startup with stable MRR, it’s much easier to receive high valuations from investors and get funded. For mature companies preparing for an IPO, a high investor valuation leads to a greater stock price.
And now, let’s dive into MRR calculation.
How to calculate MRR
The monthly recurring revenue formula is pretty straightforward.
MRR = Monthly users number * Monthly ARPU (average revenue per user)
For example, if you have ten customers paying each month $10 subscription price, your MRR would be 10 * $10 = $100. In case you offer several price plans, then you should do the same exercise for all plans and summarize the results to find out your total MRR.
Though the total revenue figure may be enough to understand the trend, MRR decomposition will unveil the root of income fluctuation in terms of a particular month. Under “decomposition,” I mean MRR types a total MRR consists of.
Types of MRR
Financial experts define five MRR types, which eventually make up the total MRR figure you see in your monthly reports. Understanding what brings you more money and where that gap your revenue leaks out is, you can control your income flow more efficiently.
- New MRR - the revenue from new customers your company acquired in a given month
- Churned MRR - the amount of revenue you lost due to customers’ subscriptions cancellations
- Expansion MRR - MRR from the upgraded users
- Contraction MRR - lost revenue from downgraded users
- Reactivation MRR - the revenue from previously churned customers
For example, below is the report generated with Baremetric tool. You can see a month-to-month revenue breakdown and how it differs compared to the previous period on the graph below.
Even though the MRR formula is not complicated at all, there is a certain risk of including or excluding data, which can confuse MRR calculation and distort the results.
So, let’s clarify what you should or should not take into consideration when calculating your revenue.
What to include into MRR calculation
The five MRR types we discussed in the previous section clearly indicate with their very names, they should be included in the total MRR calculation. But not only those figures are important. Your calculation should also take into account:
- All recurring, new, lost revenue from customers as well as plan upgrades and downgrades. Also, here goes any additional charges for extra users, seats, volume, etc.
- Discounts you provide within a specific month. If not preliminary planned, promotional activities can seriously impact the final revenue you intend to generate this month. For example, if your customer’s regular monthly fee is $150, but they paid a discounted $100 price for the first month of service usage, your MRR from this customer will be $100, not $150.
- Delinquent and transaction charges should also be minded while doing MRR calculation. Whereas some business owners tend not to mix up financial expenses with income from sales, invisible deductions will eventually pile up and “suddenly” diminish expected monthly results.
What to exclude from MRR calculation
Here the simple rule goes: don’t take into account all payments that are not recurring.
Among those are:
- Long-term contracts paid upfront
Even if a customer pays you an annual fee at once, it doesn’t mean it falls into a particular month’s revenue. In this case, the payment should be evenly divided by twelve months. Though getting money upfront is good for a company’s financial health, the MRR metric is not measuring a cash flow. Its primary purpose is to measure how fast and efficiently your business is growing by comparing month-to-month dynamics.
- One-time payments
This point is close to the previous one with a slight difference. If you offer customers not only a SaaS service but also a SaaP (software as a product), which usually implies you sell it once and leave it at customers’ discretion, then you shouldn’t include one-time payment into MRR calculation.
- Trials that don’t convert
SaaS companies’ most common mistake is including “projected” trial customers alongside those who actually paid for the subscription. We clearly understand that not all trial users will eventually convert. Including them into “new” and then “churned” customers, we create wrong monthly income expectations.
Ways to increase your MRR
You can boost your company’s revenue by employing strategies listed below. They can be used at any stage of business growth and adjusted based on the analysis of the results.
Upsell your existing customers
To upgrade your current users is usually more cost-effective than acquiring new ones. Try upselling your customers to higher-tier plans by offering extra product values. What you need to implement this strategy is to know your target audience’s exact needs and pain points.
Utilize different pricing models
If coming to your pricing page, a lead won’t find an appropriate price plan that satisfies their needs, you will more likely lose a potential customer.
Here are the most common SaaS pricing models you can try implementing with your business.
- Per-seat pricing
Freshdesk is an excellent example of this approach. They offer a broad range of pricing plans from a limited-features free plan up to a $99/agent plan suitable for enterprises. The per-seat (or per-user) pricing model’s value is its correlation to a customer’s company growth. The more the business scales, the higher the price plan they may switch to.
- Usage-based pricing
This type of pricing gives users more flexibility in terms of usage intensity. They are fully accountable for the usage volume and the cost they will end up paying. For example, Hubspot charges customers for the number of marketing contacts they will have available within the particular price plan. Though not that straightforward as per-user billing, usage-based pricing may be seen as a win-win model of customer-business relationships.
- Add-on pricing
On top of features you offer within your plans, you can give customers the possibility to enhance their existing plans with additional functionality. Referring again to Hubspot, which is definitely one of my favorite SaaS companies in terms of how they pack their services, they offer to build up to 3.000 custom reports with the increased dashboard limit for an extra $200/month.
Overall, your pricing page should be visually appealing and comprehensive. As a design agency, we are confident that user-centered design matters especially when it’s going about pages where users are expected to make the desired action. Check our SaaS pricing page design article where we gathered the worth-looking examples you can learn from.
Continue improving your product
To retain your customers and make them willing to continuously pay for your SaaS, you should keep enhancing your product and regularly demonstrate the updates to your customers. Communicate them added functionality, upcoming products, new version release, bug fixes, and any other information you find useful to increase customer loyalty resulted in a high retention rate.
Monthly recurring revenue is one of the most critical SaaS metrics you should regularly check to ensure your business is on the right track. To get an accurate result, you need to consider some nuances in MRR calculation. Think about what you need to include or exclude when calculating your MRR based on the information you learned in this article.
You can grow your revenue by price strategies diversification and consistent product improvement that will help retain existing customers and attract new ones. To get a more in-depth knowledge of crucial SaaS metrics, read next about AARRR metric in our blog.
Scaling Your Startup - How It Looks from the Product Design Perspective
At the time you notice that your startup has a steady flow of revenue, the existing processes in your company start feeling small, and you understand that your users expect more from you, probably it’s time to scale.
Deciding to scale a startup is an exciting, yet challenging process that can add a couple of gray hairs to your head because if you want to expand to new horizons, you have to take risks.
As a team of product designers, we believe that having a reliable product team, as well as a carefully thought out approach to the product design helps to eliminate the scaling risks and make your business a few steps closer to success.
And though there are a lot of articles on the internet that provide general tips about scaling your startup, here we want to focus on two challenges from the product design perspective:
- Growing your team
- Expanding your product
But first of all, let’s make sure that we mean the same thing when saying the word “scaling”.
The difference between growth and scaling
We know that growth is the second of four product life cycle stages, but very often we hear the word “scale” in the same context. Though these two terms are often used interchangeably, there is a slight difference between scaling and growing that is important to discuss in terms of our topic.
So, what does it mean to scale your business, and what does it mean to grow your business?
Let’s start with “growth”.
When growing a business we are generating more income. But in order to generate that additional growth, we have to add new resources (purchase additional materials, get a new office, hire more employees, serve more clients, and so forth). And all those things incur a bunch of other expenses. For example, you’ve generated an additional hundred thousand dollars in revenue, but it cost you eighty thousand dollars. It means you made twenty thousand dollars, which is still great.
Now let’s move to “scaling”.
When you scale a business, you generate additional revenue without entailing that same degree of expenses. Spendings rise incrementally or stay at the same level. For example, you managed to increase the amount of income by four times, without hiring a single employee. Instead, you automated some processes and spent little money on them. That is, scaling means growing exponentially.
Below is a graph that will help you better understand the difference between growing and scaling.
Now some important facts to mention about scaling:
- Scaling is not better than growing, and vice versa. The choice depends on the specific needs of your company, team, and customers.
- Scaling is not completely feasible for all businesses. It’s not something that all kinds of startups should opt for to become successful. However, it works well for the tech industry.
In this article, we focus on scaling as a faster and budget-friendlier way to develop your business.
The last point we want to mention before moving further is that before scaling your business you as a tech startup owner should make sure that
- You achieved your product-market fit, that is, your product has its audience who needs it.
- You have a stable flow of revenue which proves you’ve found the product-market fit and helps attract investors to fund your growth.
In the next sections, we will discover what startup scaling challenges wait for business owners and learn how to cope with them.
What you can do to scale your business from the product design perspective
Unfortunately, among all the roles in SaaS companies people often underestimate the role of product design in their projects’ success. They would rather hire an additional engineer and then take care of finding a strong designer. Therefore, to begin with, let’s state why it is worth considering product design when scaling.
In 2018, McKinsey conducted research aimed to identify the value of design for businesses. Based on the research, they created the McKinsey Design Index (MDI) that orders the companies according to how strong they are at design and shows the correlation of this fact with companies’ financial state.
McKinsey found out that businesses with top-quartile MDI scores outperformed the percentage of annual growth rate by as much as two to one (see the graph below).
To be more specific, here is one fact from Airbnb’s scaling story. Airbnb’s founders understood that they had the same target audience as Craigslist. That’s why each time people offered their house for bed and breakfast on Craigslist, Airbnb’s team would email them and ask if they wanted to make a post on their platform.
That’s how they reached a new audience, but the next question is: How did they manage to retain them? Here comes the power of design. Once a visitor discovered Airbnb, they were impressed by visually appealing property images and the great user experience that the platform provided.
Therefore, sending emails to Craigslist’s users and showing them the real value of Airbnb with the help of great product design led to the rapid growth of this vacation rental platform loved by people all over the world.
Good design is essential for product adoption and retention rates. It makes the product useful, understandable, aesthetically pleasing, and innovative. Therefore, when thinking out your business scaling strategy don’t forget to take care of expanding your product design team.
Growing the design team
Product designers’ duties involve having a deep understanding of the users and the value your product provides to them. As well, product designers should be aware of the company’s business goals and make all the design decisions taking into account the product's business strategy. Thus, a scaling stage startup needs product designers not to make the product "beautiful", but to ensure that the new features/offering you plan to deliver evolve your business and bring value to the customers.
A bigger design team allows you to come up with ideas faster, and most importantly, validate them quicker and more effectively. In its turn, idea validation lets you assess users’ and market’s needs, ensure you don’t implement innovations based on unverified assumptions, and therefore, prevent your scaling startup from going onto the wrong path.
Though, understanding the need to grow the team doesn’t make this process easy. Below are three main challenges that you as a product owner may face when expanding the design team:
Organizing and optimizing work processes
A 50-person team won't survive the processes of a 5-person team. When you start with one designer who performs a vast variety of duties, there’s no need to build a clear structure around the design process. Once your team starts growing you’ll have to think out how the product design department should collaborate and function to keep consistency.
That is, you have to come up with a set of standard algorithms for how your team conducts research, ideate, validate, test, communicate, exchange ideas, and so on. Such an algorithm includes defining the tools they should use, the documentation they have to fill in, the principles they have to follow, and more.
On the other hand, scaling is not only about getting more of everything: people, products, revenue, processes. It’s also important to find things that slow you down and optimize them.
Some processes that used to work well in the past can become redundant for your scaling business, like the process of getting approval, or communication overload. For example, the former CEO of General Motors, Ed Whitacre, decided to cut down the number of paperwork workers had to deal with. By eliminating the number of reports employees had to fill in, they got more time to think of innovations and come up with new ideas. This way, Ed Whitacre managed to help the company scale more effectively.
With the defined tools and processes in place, you can start growing the team and its structure.
When you enter the growth stage and your scope of work increases intensively, you may feel a great need to hire just any product designer you can find. However, hiring the wrong employees is one of the reasons why startups fail.
Here's what Diane Greene, the founder and the former CEO of VMware, says about hiring at scale: “It’s a good thing to remember that hiring will get easier as you scale — but you should also never drop your standards.”
It’s always more important to take care of the quality of the employees than their quantity. Hire those UI/UX designers who understand your product vision and have some experience in the field you work in so that they can facilitate the company’s growth. Besides, choosing a product designer who understands your product’s mission will help you maintain the company culture at scale.
One more difficulty that you may face here is the fact that the average time to fill a position is 42 days and time is your most precious resource. The solution to the faster quality hiring process may be to outsource design work.
Hiring external professionals will help you quickly find additional pair of hands to help you cope with a greater workload, and take on several ongoing projects. Additionally, outsourcing can give you a fresh look at your business, reduce costs, and, of course, save time.
For example, you may expand your team with Eleken. All our designers are product designers with expertise in creating SaaS applications. We work as in-house employees, but remotely, focusing on one project at a time. Therefore, when we design new functionality, we dive deep into the essence of your existing product with its business logic, design systems, and UI patterns to make sure we help you grow your business effectively.
Structuring the team
As Larry Page, the co-founder of Google, recalls, at the time the company stepped into its hyper-growth stage at the beginning of the 2000s and reached about 400 employees, Mr. Page began to miss the good old days without the bureaucracy and all those managers running around. Therefore, he decided to get rid of all of them. The result was that about 100 developers now had to report to one executive. Of course, it wasn’t a change for good.
The moral of this story is that business at scale does need some hierarchy and new roles in the company. The thing is to structure the team correctly.
It is impossible to find a perfect candidate for each position, therefore our advice would be to look for designers that are experts in one area, but also have good general knowledge in other fields to take another role if needed. This is called a T-shaped designer.
This way, when your team scales, you won’t have a knowledge gap because of the overlap between your employees’ skills.
The number of designers
The situation differs from company to company, but here's what Jesse James Garrett, the UX designer and the co-founder of Adaptive Path strategy and design consulting firm suggests on his Twitter account:
Still, there's a myth going on that the number of designers usually affects the project’s length. The quality of the outcome depends on the designer’s skill set, not the quantity. So, if you have enough time, you may opt for hiring fewer design specialists for your project.
According to Jason Culbertson's webinar Scaling UX in Organizations, the way businesses organize their design team depends greatly on the number of employees they have.
- Up to 10 designers: roles often overlap between team members: one designer can be responsible for the user interface, user experience, and UX research. Team members may work on different product features/products all at the same time.
- Up to 25 designers: designers are distributed into product teams, each team member has their specialization, and a couple of designers start working on the design system part-time.
- Up to 50 designers: the team that builds and evolves the design system grows from 1-2 to 3-4 designers and starts working full-time.
- Up to 100 designers: separate teams are responsible for everyday product design tasks, owning the design system, and so on.
Expanding the product
When your startup scales, the team, the number of code lines, and features scale with it. As the result, it becomes difficult to control that every new employee adheres to the company’s design standards and principles to keep your product/s consistent and user-friendly. Additionally, if your designers work in distributed teams they may start performing repetitive tasks, like creating a new version of button design and the like, which is not only a waste of time and resources but also the worsening of user experience.
This mess in the design process negatively affects the product’s performance. Therefore, once your product team grows beyond 15 designers and the company has more than 500 workers, it’s definitely high time to build a UX design system.
UX design system is a collection of standards to manage scaling business design. It ties together all components of your product like colors, typefaces, and illustrations in a structured and unified way. It also helps to fix inconsistencies and build a unified visual language to help you create a scalable product.
For example, once the Eleken team had to work with TextMagic, a customer experience platform that evolved its product vision and decided to expand the number of products they had. Luckily, they already had a well-developed design system, and though we had a lot of work to do, putting Textmagic’s design system in practice allowed us to stay productive, quicker cope with the workload, and keep consistency across the whole product set.
To sum up
Investing in product design can help your company stand out in the market and favorably influence the overall business growth. To be able to cope with all the challenges that a scaling phase brings it’s important to have a reliable team with you.
So, how about hiring a senior product designer at Eleken? Share the details of your project, and we will provide you with the best expert for the job.
Why MVP Design Matters or How to Build an MVP Your Users Will Love
“Make something people want”. The Y Combinator founders chose this phrase as a slogan back in 2005 when a startup accelerator company was started. And this phrase proves to be true, since an overwhelming majority of startups fail because they didn’t properly evaluate the market’s demand and launched products people never needed.
CBInsights stated that the development of interesting solutions rather than focusing on satisfying real market needs became the Number Two reason for startup failures.
The most effective antidote from a dizzying startup fiasco is probing market feedback by offering users a product Minimum Viable Product (MVP).
This post will uncover why MVP is important, what people often misunderstand about MVPs, and how to create an MVP design that helps your newborn product grow into something significantly big.
But first, let’s refresh what we know about an MVP concept.
What is MVP?
As mentioned before, the term “MVP” stands for a minimum viable product that helps a business understand how the market reacts to a new idea. It’s a somewhat pared-down version of a product, which contains only core features.
By presenting the MVP to the market, the business can identify the product’s weaknesses and, on the other hand, uncover the previously unobvious potential that can be turned into strong value propositions. The term appeared back in 2001 when Frank Robinson, the president of SyncDev, first introduced it. However, the MVP concept got popular ten years later thanks to Eric Ries, the Lean Startup movement initiator.
MVP means not “missing” some features but having that “minimum” to get a workable product
If you ask different business departments what they understand under the term "MVP", you may get quite various, yet quite the same answers.
Designers can tell you: “It’s a very thing users need the most.”
Engineers think that MVP is "a core functionality that resolves customer problems."
And business owners consider MVP the fastest and low-cost way to gather market feedback.
In all fairness it has to be added that the MVP has an undeniable value not only for business but users. Let’s elaborate more on this subject.
MVP value: for businesses and users
Each business aims to increase profit and decrease costs to remain sustainable. That’s where an MVP works the best. The ultimate goal of the MVP is to evaluate market feedback and decide on further product development direction.
Despite the word “minimal” in its definition, It’s crucial to remember that the MVP doesn’t mean a shoddy “raw” product version, which is incapable of solving users’ problems.
Your MVP should be a fully accomplished product that has only necessary features to address the issue you design the product for.
A minimum viable product development enables businesses to:
- Identify a product’s weaknesses and gauge its potential.
- Determine if the market needs your idea by collecting early adopters’ insights.
- Reduce development costs by focusing on the paramount features only.
Okay, all is clear for the business. But what about users?
Perhaps, it’ll be a bit of a surprise, but most people don’t like feature-extensive products.
Our brain can cope with a limited number of things before feeling overwhelmed, and this number is seven. Anything that is more provokes “decision fatigue”.
From this perspective, having minimum features, the MVP enables users to operate your product easily and without any frictions. Thus, you build the base of loyalty to your product long before its full version goes live. By the way, to see how famous SaaS companies benefited from their MVPs, check out our dedicated article on minimum viable product examples.
Regardless of MVP concept transparency, it’s still covered with some myths we’re going to debunk right away.
Misconceptions about MVPs
Myth #1 - MVP is easy to create.
This delusion roots in a seeming simplicity of the final solution. However, to make the minimum product really viable, all teams should be absolutely clear with and comprehend a) a product idea and a market need behind it and b) principal features to satisfy the need and test the idea. If all team members don’t act as a refined mechanism, the development process may be very challenging.
Myth #2 - MVP has one main feature only
Whereas some MVPs focus on one primary feature, it’s rather an exception than a rule. Typically, it goes about a feature set that makes up a core functionality of a product. So, it would be more appropriate to say that an MVP supports only must-have functions required to achieve the expected result.
And finally, as opposed to the above, Myth #3 says that MVP undermines core functionalities, which isn’t true, as a product still does its job taking into account business goals.
So, if MVP stands for “minimal”, is it really important to be bothered with its design? Shortly, yes. And let’s see why.
Why do MVP UX and UI design matter?
You might have heard that every dollar you spend on UX brings from two to a hundred dollars in return. This statement is backed up by studies proving the positive impact good UX has on ROI.
The minimum viable product implies limited resources and efforts you apply to put your pilot product version on the market. However, it doesn’t mean you should neglect the experience people will get testing your MVP. On the contrary, your ultimate goal is to make the best possible impression on the potential users so as they become your first loyal customers when the product is launched.
I went on Quora to investigate deeper the importance of UI/UX design for MVP and found a couple of opinions I’ll leave here for your consideration.
"As you know, MVP is a minimum viable product that includes basic features only. An MVP is created to attract users and identify how viable your product is, and whether it is competitive or not. So, as it is clear, UI and UX play a huge role in the MVP’s success, and how crowd-pleasing it will be. For example, as for UI, it is the first thing users pay attention to. UI of your product should be eye-catching and not irritating, so it is the guarantee that users will keep on using your software further."
Eugenia Vish, Design & Development Manager at Cadabra Studio.
"Extremely important. UX/UI at the starting stage of any product is very important as you are testing out early features and preferences of users. If you do not pay attention to the design or experience, users might not even understand how to use your product or what your features can do. So in order to get great insight and conduct good research on your product and its features, UX/UI matters even at the MVP stage."
Dhisti Desai , CEO & Founder
So, if you agree with MVP’s design importance, the next question you may have is how to build effective MVP UX design.
MVP design: stages and aspects
Before you start designing your MVP, it’s critical to ensure you know the answers to the following questions:
- Who are your customers?
- What are those problems you have a solution to?
- Is your product what your customers need?
- If yes, can they easily use it?
- What features do your customers appreciate the most?
Once you answer these questions, you’re ready to embark on an MVP application design.
In its essence, MVP design doesn’t differ from a typical product design process Eleken, as a design team, go through each time working on clients’ projects.
Namely, our designers pass the following stages when building customer-centered designs:
- Conducting UX research and competitive analysis
- Creating user flows and customer journey maps
- Building wireframes and prototypes
The ultimate goal of MVP design is to turn users into your product advocates who will help your minimum viable product grow into a profitable business. To achieve this goal, consider the aspects below when working on your MVP design.
Test product hypotheses
The MVP design plays a vital role in the early stage of your product development when you test your initial product idea. The design will help you gather true feedback from potential users and understand how you can make your product better. For example, the smartwatches company Pebble raised ten million dollars on Kickstarter with its e-paper based smartwatch design.
Enhance MVP usability
With the help of analytical tools such as Mixpanel, Google Analytics, or Firebase, you can get insights on how users interact with your app and improve its user experience based on received data.
Work out new hypotheses
The insights you got when testing your previous product hypothesis will underlie further redesign decisions you make to improve the product’s usability.
Build an attractive UI
Even though we accent more on the UX design, the appealing user interface plays a significant role in the overall product’s perception by the audience. Therefore, to deliver a great customer experience, your MVP should be both usable and attractive.
As a conclusion
The minimum viable product idea suggests not to invest too much time and resources into building a fully functional product unless you’re confident the market needs the solution you offer. However, don’t overlook the UX design stage. Learning your audience and tailoring the product to your customer’s needs will help you grow your MVP into a profitable product.
With this said, we stretch you a helping hand if you need any assistance in building great UI/UX design for your MVP. Think about your world-changing idea, and we’ll brainstorm how to design it.
Sounds good? Just drop us a line.