Monthly Recurring Revenue (MRR) is a frequently mis-interpreted metric in the subscription world. Similar to most SaaS metrics, there is no standard definition on how to derive it. However, what it’s supposed to represent is more universally agreed upon — a measurement of subscription growth and momentum. So while, MRR can be representative of revenue, it’s not the traditional GAAP revenue most people in the finance world think about. In fact, it cannot and should not ever be reported as GAAP revenue.
In a subscription business, there are four primary ways to view your revenue. So when “revenue” is mentioned without context, then it’s up for interpretation. It could represent bookings, GAAP, performance, or even cash.
On a high-level, the traditional GAAP-compliant accounting revenue is on an accrual basis and factors in discounts, refunds, and prorations for revenue recognition. Accounting revenue is primarily used for income statements and financial reporting of the company. MRR, on the other hand, is used primarily to track performance of your subscription business.
But, why?
It’s very difficult to get a clear sense of your subscription performance with only GAAP revenue due to potentially significant fluctuations to the numbers. For instance, if you were to do revenue recognition on your revenue prorated by day, your February (28 days) to March (31 days) revenue growth would be 10%. Then in April, your revenue would contract 3%. This is inaccurate with regards to the actual subscription performance because the subscription itself has never been modified in any way. MRR is used to normalize these fluctuations to work towards finding true performance.
Let’s use an example of a $1,200 annual contract that begins on Jan. 15, 2015:
| 2015 | Jan | Feb | Mar | Apr |
|---|---|---|---|---|
| GAAP Revenue | $559 | $921 | $1,019 | $986 |
| MRR | $1,000 | $1,000 | $1,000 | $1,000 |
In this example, for months Feb/Mar/Apr, you can easily see how all the noise generated from reporting GAAP recognized revenue is removed for MRR. For Jan, you’ll see that we did not prorate the MRR for that month. This is because MRR is typically and frequently measured with a constant value in each month of the subscription period (the contract or plan value per month). One might argue that this is inaccurate as it adds an extra month to the term for any start date that isn’t the 1st, but this is the exact reason why we cannot view MRR as true “revenue”.
It is easy for most companies that are unfamiliar with the ever-evolving SaaS metrics landscape to confuse MRR and revenue. However, it’s important to realize that while GAAP revenue has many accepted rules surrounding how to report it, there are none for MRR. Because of this, there is significant effort to try to reconcile between the two for them to “match up”, which is near impossible as virtually anything that could (or should) be excluded or included in MRR varies significantly from business to business. It would take a tremendous amount of time, for not that much gain. Perfect data integrity is essential for financial audits hence GAAP standards for revenue recognition, but for subscription metrics and projections, businesses do not need to be 100% accurate since the goal is to analyze growth and momentum, not report to the SEC or IRS.
This is not to say that you should just slack off on maintaining accurate MRR calculations. Since there are no rules associated on what to include to adjust MRR, it’s entirely up to the company. With proper bookkeeping, you could keep it clean and not include adjustments, however, this may not always be the case. In addition, there are a variety of variable revenue in addition to fixed revenue that could be considered as recurring. As long as you can make the case that this revenue is predictable or consistent, then it might be worth including in your MRR.