Subscription businesses rely on recurring revenue. To evaluate their success, they monitor an important metric called monthly recurring revenue (MRR). It’s the amount of money that the company makes monthly from subscriptions. This amount changes with new subscribers, cancellations, upgrades, and downgrades.
Let’s see what factors to consider when predicting a monthly recurring revenue and what to avoid for an accurate MMR forecast.
How to Forecast Recurring Revenue?
Recurring revenue is a company’s total income from recurring payments. Forecasting recurring revenue is essential for successful budgeting and business planning.
There are two ways to calculate and forecast recurring revenue. Companies either use forecasting recurring revenue software for automated calculations, or manually calculate the revenue using spreadsheets.
For both methods, companies need to input key metrics about their subscriber base and subscription prices. The metrics include:
- Number of subscribers at the beginning of the period (month, year)
- Number of new subscribers
- Churned recurring revenue (canceled subscriptions)
- Revenue gained through upgraded subscriptions
- Revenue lost to downgraded subscriptions
- Average revenue per user (ARPU)
Let’s see how to manually calculate monthly recurring revenue (MMR) and annual recurring revenue (ARR) using these metrics.
How to Forecast Monthly Recurring Revenue
The basic formula for calculating MMR is simple:
Number of Monthly Subscribers x Price of Monthly Subscription per User
Example: 100 monthly subscribers x $10 per user = $1000
If your business has more than one subscription tier, calculate the MRR for each tier and then add them all up as follows:
(Number of Monthly Tier 1 Subscribers x Tier 1 Price per User) + (Number of Monthly Tier 2 Subscribers x Tier 2 Price per User)
Example: (100 monthly Tier 1 subscribers x $10 per user) + (50 monthly Tier 2 subscribers x $20 per user) = $2000
For an accurate MRR calculation, add the churned MRR, monthly upgrades, and monthly downgrades to the formula:
(Number of Monthly Subscribers x ARPU) – Churned Revenue – Downgrades + Upgrades
Example: (200 subscribers x $20 per user) - $40 in churned revenue - $20 in downgrades + $40 in upgrades = $3,980
Excel has a forecast function that enables easy recurring revenue forecasting. Input data for the previous months’ recurring revenue in the spreadsheet and use appropriate forecast.ets formula details to calculate MRR for the following month(s).
How to Forecast Annual Recurring Revenue
Annual recurring revenue (ARR) is the yearlong version of monthly recurring revenue. Its basic formula is the same as the MRR formula:
(Number of Subscribers During the Calendar Year x ARPU) – Churned revenue – Downgrades + Upgrades
An easier way to calculate ARR is to multiply MRR by 12. This formula may be inaccurate if subscriptions fluctuate a lot each month.
What to Avoid When Predicting Recurring Revenue
Avoid the following mistakes when predicting recurring revenue.
- Factoring in one-time payments. Including revenue from one-time purchases in recurring revenue calculations results in an inaccurate estimate of recurring revenue.
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Adding annual subscriptions to MRR. Annual subscription amounts must be divided by 12 for accurate MRR calculations.
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Adding trial period subscriptions. Including the full subscription price in MRR calculations for subscribers who use a free trial version results in an inaccurate recurring revenue amount. Include trial version subscribers in the recurring revenue calculation only if they become paying subscribers.
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Neglecting discounts. Subtract processed discounts from the recurring revenue calculation.
Conclusion
Predicting monthly recurring revenue is important in understanding how a business evolves month after month. Careful monthly revenue tracking allows for quick changes to sales, marketing, and customer support efforts based on subscriber behavior.