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How To Use Recurring Revenue To Forecast Your Future
Published on Monday, January 18, 2021
Your SaaS or subscription-based business is likely to depend heavily on monthly recurring revenue, also referred to as MRR.
Rather than worrying about once-off sales in each new month, having subscription customers gives you recurring revenue. This gives you a feeling of slightly more stability; a consistent flow of income that allows you to run your business.
And, it is a helpful tool to assist you in monitoring your business’s path of growth, or whether your revenue is diminishing or leveling out. Most importantly, some would argue, MRR gives you the ability to forecast your future sales revenue, “which further gives you insights into whether you should make adjustments to your budge.”. As such, it is an important metric to keep in mind at all times.
How To Calculate Monthly Recurring Revenue – MRR
There are several methods to use to determine your monthly recurring revenue. However, your chosen method will depend on what insights – relating to your revenue – you are trying to gain. Here are some formulas and calculations you can use.
The Basic Method
Using this formula, you can calculate your recurring revenue from subscription clients for one month. However, you should take into account that if your SaaS business offers various levels of subscription, which most do, then you’ll have to do a separate calculation for each tier of subscription and then add the result of each tier’s calculation together, to get the final MRR.
Number of subscriptions x Monthly Unit Billing Amount = Monthly Recurring Revenue.
So, for example, if you had three types of monthly subscriptions, a basic subscription which costs $40 per month, a mid-range subscription which costs $65 per month, and a premium subscription which costs $80 per month, then this is how you would calculate it (assuming you have five customers at each tier):
5 subscribers x $40 = 200
5 subscribers x $65 = 325
5 subscribers x $80 = 400
$200 + $325 + $400 = $925 (MRR)
It’s a relatively simple calculation, but a very helpful one.
Calculating Net New MRR
In determining the net new MRR, you ascertain the recurring revenue acquired by your SaaS business, monthly, from new clients or those who upgrade. When it comes to metrics, this one is likely to be most pertinent to your sales team, as it shows them the amount of recurring revenue they are collecting monthly through their efforts.
Here’ how to determine the net new MRR:
New MRR + Expansion MRR – Churned MRR = Net New MRR.
New MRR is the revenue acquired from new clients in any given month, expansion MRR is determined by looking at the revenue from all clients who have upgraded, and churned MRR is the amount that you no longer have as a result of canceled contracts or clients moving to lower-tier plans.
Mistakes To Avoid
As with any calculation, mistakes are common. In both calculations, there are two main mistakes to steer clear of.
The first mistake is adding the total value of contracts that were purchased or a year, for six months, or four a quarter. Rather than adding their full value, you should divide the total value by the length of the subscription to get the monthly recurring revenue from that one subscription. The second mistake to avoid is adding once-off payments into the MRR calculation.
Why You Should Calculate Your Recurring Revenue
Calculating your monthly recurring revenue is important for several reasons and can help you in many ways. For instance, it can show you whether your efforts to sell your product or service (including the marketing component) is working or not. It also allows you to gauge where your strengths lie and where your weaknesses are. Moreover, you will make better choices for your company.
Most importantly, though, determining the MRR precisely assists you to see the progression of your business’s growth. And, this allows you to gain insights into the future of your business.
Forecasting Using Monthly Recurring Revenue
So, you’re probably wondering how these calculations will give you the power to forecast your future. With forecasting at the most fundamental level, a business will calculate their recurring revenue for any given month and will conclude, based on that information, that their revenue will be on the same path in the following month. This, however, is not the best way to do it.
A better method to use, for more precise conclusions, is exponential smoothing. This method takes not only the past month’s conclusions but also your business’s historical MRR outcomes.
Essentially, the method takes a certain group of data into account. It then places a high value on later data and less value on older information. The method also considers the fact that there are periodical changes based on trends in the market. By doing these things, the method predicts future outcomes.
Using exponential smoothing, you can forecast any version of MRR that you want to. For instance, by placing a focus on churned MRR you can determine if your teams should put more work into convincing customers to upgrade their accounts or ensuring that clients are not lost throughout the month.
Or, you can evaluate all variations of MRR to find out which are doing well and which are moving in the negative direction. From here, you’ll know where to focus your finances.
Automate The Process
Most businesses make use of spreadsheets and excel to forecast their future sales and revenue. This, unfortunately, is extremely inefficient and can be highly inaccurate at times. But not to worry, there is an easier and more effective way to do it.
revVana automates the entire process by making use of Salesforce. With Salesforce, you can customize your sales forecasting in any way you need to. You’ll be provided with forecast details of opportunities in different categories of sales including those in the pipeline, those who have committed, and those with whom deals are closed.
Just remember revenue forecasting is different from sales forecasting.
Well, from the sales forecasts generated with Salesforce, revVana generates a revenue forecast. It does so by translating those sales at different levels (pipeline or closed, for example) into forecasts of revenue streams and this happens automatically. Your business will have the ability to control and adjust revenue over time and create forecast data using any criteria that you please. And, again, this happens automatically.
Benefits Of Forecasting Your Future
To sum up, it is important to consider what the benefits are of using your monthly recurring revenue to forecast your future. Let’s take a quick look at what you will gain:
- Your business will be able to come up with a better strategy and plan for the future based on the information that you have gathered. You’ll know where to allocate funds and where to focus more attention.
- You will know where your opportunities lie.
- You will save time, money, and manpower.
When it comes to the growth and stability of your SaaS business, it would be difficult to deny that forecasting can come in handy.
Forecasting your revenue is extremely important for the flow of your business. It allows you to make solid decisions that carefully take all the important numbers into consideration, and it gives you an outlook of what is to come, so you can plan for the future appropriately.
And, since it’s such an important task, you wouldn’t want to risk any errors. For that reason, an automated software, such as revVana, is massively helpful. Start planning for your future with recurring revenue and forecasting as soon as you can, to get ahead!