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Forecast your subscription business using MRR

Written by Remco Kroes on . Posted in Exact Online

A recent survey by Exact showed that businesses expect revenues to pick up in the next few years. It looks like we left the recession behind and firms are more positive on their business outlook. Growth is back on the agenda! Achieving growth is now one of the key priorities for many businesses.

Achieving growth
In a typical subscription-run business growth is achieved by acquiring new customers, upgrading existing customers, and preventing customers from cancelling (‘churning’) or downgrading their subscriptions. However, when running such a subscription based business measuring growth can be hard. Especially when you are offering multiple subscription plans with dissimilar terms and conditions. For example, offering monthly based subscriptions next to annual based subscriptions. To add to the complexity, many firms still rely on spreadsheets. Making it even harder to monitor growth accurately.

Choosing the right metric to monitor growth
No matter whether you are a start-up or a public company, one of the key metrics used to monitor growth in a subscription run business is ‘Monthly Recurring Revenue’ (MRR). This metric is relatively new and currently adopted by many fast-growing SaaS firms. MRR calculates subscription fees normalized to a monthly amount. It typically excludes one-time (e.g. set-up fees) or usage fees.

Why MRR?
One of the main reasons why firms with a growth objective are using MRR is to better track performance and monitor growth trends. Real growth rates and real churn rates are difficult to measure when offering a variety of subscription models. Not every subscription is alike – terms and conditions may differ per customer or customer segment. Various pricing plans may exist and subscriptions can be offered on a variety of terms (e.g. on an annual, quarterly or bi-monthly base).The MRR metric helps you to average your various pricing plans and billing periods in to a single and consistent number that you can use to determine whether or not you are on track in realizing your growth objective.

Net add MRR
As stated earlier growth is achieved by acquiring new customers and preventing customers to churn or to downgrade their subscription. You cannot meet growth objectives by only focusing on generating new customers. If existing customers decide not to renew their subscription or decide to downgrade you need to acquire even more new customers. Acquiring new customers can be costly. When you are able to upsell or deepsell – you do not only have an ability to positively impact net add MRR but also reach MRR growth at lower customer acquisition costs. Assuming that it is less costly to target existing customers than targeting new business. It is key therefore to monitor how MRR develops within a timeframe. What is the net added MRR in a given period? It is key to monitor cancellations, renewals, upgrades and downgrades.

What’s coming up: MRR reporting in Exact Online
Exact Online supports subscription run business by offering an all-in one solution including recurring billing, CRM, projects and accounting. We want to better support our customers in measuring growth of their subscription business. This year we made investments to enhance our subscription engine, e.g. subscription cost analysis. Next, we are planning to release a wide range of recurring revenue reports and dashboards reflecting best practices in managing subscriptions – including the ability to monitor MRR, net add MRR, cancellations, and more. For more information, please contact remco.kroes@exact.com

 

subscription reports

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