It’s no secret: the competition in the eCommerce market is fierce, and it’s only getting worse. In fact, we’ve seen that the average cost per acquisition (CPA) for acquiring new customers has increased by 20% over the past year alone.
So, how can you compete? The answer is simple: focus on retention.
Monthly recurring revenue (MRR) is a key metric for measuring the success of a business’s recurring revenue stream and serves as an indicator of a company’s overall financial health. In this article, we’ll share all about MRR, how to calculate it, and how eCommerce businesses can boost it.
What is monthly recurring revenue?
Monthly recurring revenue (MRR) is a metric that measures the recurring income generated from customers on a monthly basis. It is the sum of all monthly subscription fees from customers, excluding one-time charges or upfront fees.
It’s important for businesses to measure their MRR because it allows them to see how much money they’re making from their existing customers. This information can help you determine whether or not your pricing structure is working for you and, if so, how much it’s costing you to acquire new customers.
What are the different types of MRR?
MRR can be divided into different types, each of which represents a different aspect of a business’s recurring revenue stream. Some of the common types of MRR include:
1. New MRR
New MRR is the monthly recurring revenue generated from new customer subscriptions or the sale of new services. It is a key indicator of a business’s growth and can be calculated by subtracting any cancellations or downgrades from the total amount of revenue generated from new customer acquisitions or service offerings in a given period.
Monitoring new MRR helps businesses understand their success in attracting and retaining new customers, and can provide insights into areas that may require improvement to drive further growth.
2. Expansion MRR
Expansion MRR refers to the additional revenue generated from existing customers, typically through the upgrade of existing services or the purchase of new ones. This type of MRR is an important metric for ecommerce businesses, as it highlights the growth potential within their current customer base.
To measure Expansion MRR, businesses should track the amount of revenue generated from service upgrades or the sale of additional subscriptions to existing customers. This can provide valuable insight into the success of upselling and cross-selling strategies, and help businesses identify opportunities for continued growth and expansion.
3. Churned MRR
Churned MRR represents the recurring revenue loss resulting from customers who have discontinued their subscriptions or services. To calculate Churned MRR, businesses should identify the amount of revenue lost due to customer churn within a specific time frame.
Understanding Churned MRR is critical for ecommerce businesses, as it highlights the impact of customer attrition and helps identify areas for improvement. By tracking Churned MRR, businesses can gain valuable insights into customer behavior and make necessary changes to reduce churn and increase customer retention.
4. Contraction MRR
Contraction MRR refers to the reduction in recurring revenue due to downgrades or changes in services by existing customers. This can be due to them moving from an annual plan down to a monthly plan or switching from one service provider to another—it all depends on what kind of company you have and what kind of services you offer.
5. Net MRR
Net MRR means taking into account both the new and expansion MRR and the churned and contraction MRR; netting out those other two factors can help you understand where your business stands at any given time.
By considering these factors, net MRR provides a comprehensive view of the overall health of a business’s recurring revenue stream. It helps businesses understand the balance between revenue growth and customer retention, which is crucial for long-term success.
It’s important to keep track of each of these types of MRR as they provide insights into different aspects of a business’s recurring revenue stream. Understanding the different types of MRR can help businesses make informed decisions about how to improve their MRR and grow their business sustainably.
Why is monthly recurring revenue important in eCommerce?
MRR is an important metric for eCommerce businesses as it provides a clear and concise picture of the recurring revenue generated by customers.
Here are four reasons why MRR is important in eCommerce:
1. Predictable revenue
MRR provides businesses with a consistent and predictable stream of revenue, which is essential for planning and forecasting future growth. By understanding their MRR, businesses can make data-driven decisions about allocating resources, investing in new products or services, and determining the right business strategy.
2. Increased customer lifetime value
A strong MRR means that customers are retaining services and generating repeat business, which in turn leads to an increase in customer lifetime value. This increase in customer lifetime value leads to a more sustainable revenue stream and reduces the cost of acquiring new customers.
Additionally, customers who are more likely to generate repeat business are typically more engaged with the brand and more likely to promote it to others, further increasing the lifetime value of those customers.
3. Better cash flow management
With a predictable revenue stream, businesses can better manage their cash flow and avoid the ups and downs that often accompany one-time sales. By having a clear understanding of their recurring revenue, businesses can better anticipate and plan for changes in cash flow, helping them to maintain stability and avoid any financial surprises.
4. Higher valuation
Companies with a strong MRR are typically more valuable to investors as they have a more predictable revenue stream and a proven ability to retain customers. This increased value can make a business more attractive to investors, helping to secure funding and allowing for future growth and expansion. Additionally, a strong MRR can be used as a negotiating tool in merger and acquisition discussions, as it provides evidence of a business’s stability and potential for growth.
How to calculate MRR for your ecommerce business?
MRR is calculated by multiplying the number of subscribers by the average revenue per subscriber, then dividing that number by the number of months in a year.
The formula is:
MRR = (Number of subscribers * Average revenue per subscriber) / 12
It is important to note that MRR is a dynamic metric, meaning it can change each month based on changes in the number of subscribers, average revenue per subscriber, and churn rate. To calculate MRR accurately, it is important to consider all of these factors and make adjustments to the formula as needed.
For example, if a business has 100 subscribers, each paying an average of $50 per month, the MRR would be calculated as follows:
MRR = (100 * $50) / 12 = $4,166.67
MRR can also be calculated for different time periods, such as weekly or quarterly, by adjusting the number of months in the formula accordingly. By regularly tracking MRR, businesses can better understand their recurring revenue stream and make informed decisions about how to grow and scale their eCommerce operations.
How can eCommerce businesses boost MRR?
By implementing these strategies, eCommerce businesses can boost their MRR and grow their businesses sustainably. It’s important to continually monitor MRR and make changes as needed to ensure continued growth and success.
1. Subscription model
A subscription model allows businesses to offer customers recurring access to products or services for a recurring fee. This model is particularly effective for businesses that offer products that require regular replenishment, such as monthly delivery of household goods.
An example of a successful eCommerce business using the subscription model is Dollar Shave Club, which offers monthly deliveries of razors and other grooming products.
2. Membership model
A membership model allows businesses to offer exclusive benefits to customers in exchange for a recurring fee. This model is particularly effective for businesses that offer products or services that are only available to members, such as online courses or private communities.
An example of a successful eCommerce business using the membership model is Blue Apron, which offers a cooking club that provides members access to exclusive recipes and ingredients.
3. Customer loyalty programs
Customer loyalty programs reward customers for repeat business, which helps to encourage them to continue purchasing from a business. Loyalty programs can be simple, such as offering discounts for repeat purchases, or more complex, such as offering tiered benefits based on the amount of business a customer generates.
An example of a successful ecommerce business with a customer loyalty program is Sephora, which offers its Beauty Insider program, which provides members with exclusive rewards and benefits based on their purchases.
4. Hyper personalization
Hyper personalization goes beyond basic demographic information and uses data on how customers interact with a business to provide a more personalized experience. This can include personalized product recommendations, targeted email campaigns, and a customized website experience.
By using hyper-personalization, businesses can increase customer engagement and drive repeat business.
5. Omnichannel communication
To stay on top of customers’ minds, businesses need to be present where customers are, and that means having an omnichannel presence. This includes email, SMS, social media, and other channels.
By effectively communicating with customers across multiple channels, businesses can build stronger relationships and increase the likelihood of repeat business.
MRR is a critical component of the success and sustainability of ecommerce businesses. By focusing on increasing MRR, businesses can build a strong, predictable revenue stream and drive long-term growth. There are several ways to boost MRR, including implementing a subscription model, offering a loyalty program, using hyper-personalization, and using omni-channel communication strategies. By taking advantage of these strategies, businesses can improve customer retention, increase customer lifetime value, and drive a more sustainable and valuable revenue stream.
At Appstle, we understand the importance of MRR and are dedicated to helping eCommerce businesses stabilize and grow their MRR through our cutting-edge app development services.
If you’re looking to take your MRR to the next level, we invite you to book a demo with us and see how our experts can help your business succeed.