Software Growth

MRR growth rate

MRR growth rate is the percentage change in monthly recurring revenue from one period to the next, most often month over month.

MRR growth rate shows how fast recurring revenue is changing relative to its size. Dollars added tell you how much you grew. The percentage tells you how that compares to where you started, which is what lets you judge momentum at $2k and at $200k.

How to calculate MRR growth rate

If MRR goes from $20,000 to $22,200, the growth rate is (22,200 - 20,000) / 20,000 = 11%. The numerator is your net new MRR, $2,200.

The same formula works for any period. For a year, $20,000 to $32,000 is 60% growth. To compare periods of different length, convert to a monthly rate with the compound monthly growth rate, which in that case is about 4.0% a month.

Month-over-month vs year-over-year

  • Month over month is the operating view. It reacts quickly but is noisy, because one large customer can swing it.
  • Year over year smooths seasonality and is what outsiders usually quote, but it hides recent changes.

Rob Walling puts MRR and month-over-month growth at the top of the metrics list for early SaaS, and advises tracking both the percentage and the absolute dollars (episode 620).

Why it declines as you grow

Going from $1,000 to $2,000 is 100%. Going from $100,000 to $102,000 is 2%, despite adding twice the dollars. Percentage growth almost always falls as the base gets bigger, so a falling rate is not automatically a warning. Check whether net new MRR in dollars is holding up, and look at what drives it: new, expansion, churn.

Mistakes to avoid

  • Using a noisy month. Average over three or six months, or use CMGR.
  • Counting one-time payments or unnormalized annual payments in MRR, which creates false spikes. See the MRR rules.
  • Averaging monthly percentages. The simple average of monthly rates overstates compounded growth when rates vary. Use CMGR.
  • Quoting growth without the base. 50% growth off $800 MRR is not the same story as 50% off $80,000.

Small SaaS angle

For a product under $10k MRR, a few customers move the rate a lot, so set yourself a target in dollars of net new MRR per month and use the percentage as context. As a founder you can also back into the churn you can afford: if you add $1,500 of new MRR a month and lose $750, your net is half of your gross, which tells you whether to work on acquisition or on keeping customers.

Sources

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