Monthly Recurring Revenue (MRR) is that portion of a company’s earnings that it is almost guaranteed to receive in a 30-day period. Recurring revenue is the most stable a company’s profits can be, and can be relied upon at regular intervals for the foreseeable future.
How does MRR work?
An easy way to understand how MRR works is to consider a cloud storage service such as DropBox. The service is free to begin with, but for a monthly fee, customers are able to drastically increase the amount of cloud storage available to them. This means that even if no new customers sign up in a particular month, DropBox is still guaranteed to receive a set amount of revenue from existing subscribers at a regular interval, i.e. on a monthly basis. The degree of certainty in receiving MRR is supported by the fact that as long as customers continue to use the service, they are contractually bound to keep paying the subscription fees. Using this MRR, DropBox is then able to divert funds towards maintenance of its free services, smartphone apps, and other regular operational costs.
Pricing flexibility is an important factor in MRR. Companies can choose to opt for bulk payments (annual subscription fees), regular interval payments (monthly subscription fees), or a combination of both. In addition, companies can choose to offer special bonuses around special occasions (e.g. New Year, religious holidays etc) to entice people to use the opportunity to sign up for a longer subscription, thereby increasing their MRR.
When a company is guaranteed a certain amount of revenue every month, it affords a degree of financial stability. This financial stability translates into operational constancy. With a minimum amount of revenue almost a certainty every 30 days, production and development of a company’s product and services can be carried out smoothly. The company can use MRR predictions to better plan their monthly, quarterly and annual budgets. There is a significantly lower risk of immediate failure. This in turn boosts employee morale and increases productivity in the workplace, which allows an environment to develop that fosters innovation. Innovation is a means to bring in greater profits, which can further increase the MRR. Therefore, it can be said that monthly recurring revenue sets in motion a chain of events that are all beneficial to a company’s growth and development.
In short, MRR is essential for the survival of any company.