Why even do a post on what MRR is? Because I’ve come to realize that there are people out there, that consider themselves to be entrepreneurs, that actually don’t seem to know the difference between MRR and monthly transactions.
I’ve noticed this over on Indie Hackers when a user will post an
accomplishment status about how they recently exceeded a certain MRR milestone.
The MRR number they cite is the same number that Indie Hackers shows on their product profile as their monthly revenue.
If you only offer monthly subscriptions, this is probably an accurate number.
But, like many of the products listed on there, if you accept annual payments,
the revenue number reported is thee total amount of money you transacted for the month, and not a true representation of MRR.
So what the heck is MRR anyway?
MRR stands for “Monthly Recurring Revenue”. It’s a term used to describe the
amount of money being earned from subscriptions.
If you offer a service for $100 per month, that’s $100 of monthly recurring
revenue. This can also be extrapolated out to ARR or “Annual Recurring Revenue”.
That $100 of MRR is $1,200 of ARR.
As mentioned, this is all well and good, but the moment you sell a $1,000 per
year subscription (upgrade to yearly and get 2 months free!), you immediately
have $1,000 on your books for the current calendar month.
That $1,000 is not monthly recurring revenue, as it’s paid one time, annually.
To determine the MRR from your ARR, you flip the equation and divide by 12,
which in this case, gives you $83.33 of monthly recurring revenue.
As you can see, 83 bucks a month is not the same as a cool grand. If you
consider that to be your MRR, you’re going to end up with wildly inflated
revenue numbers.
My hope is that folks are just extremely quick to find a way to humblebrag and
give themselves a good ol’ pat on the back, and that’s why they misconstrue the numbers.
But, as we’ve seen with the mountains of debt in the world, I have to believe
that at least a few people out there really don’t actually understand their
numbers.
Hopefully nobody is off making hasty spending decisions based on a perceived
cash flow which doesn’t exist.
