Monthly recurring revenue (MRR)
Monthly recurring revenue, or MRR, is the predictable subscription revenue a business earns in a month, counted as a rate of revenue rather than as cash received. New sales, expansion, downgrades and churn move it. Sales plans use it as a commission basis by paying a multiple of the MRR a rep adds.
Most of the trouble with MRR starts with treating it as an amount of money that arrived. It is a run rate. A customer who prepays $60,000 for twelve months contributes $5,000 of MRR every month of that year, and the month the cash landed is not special. Read the bank statement instead of the contract and you will report a spike that never happened, then pay commission on it.
The movement is the useful part, and it has four components that pull in different directions. New business is MRR from customers who had none. Expansion is more MRR from customers who already had some, through seats, tiers or usage. Contraction is a downgrade. Churn is a departure. The board sees the net of all four. Sales reps are typically paid on only the first two, because they cannot be held responsible for a renewal decision made eight months after they left the account.
That gap is worth naming out loud when a plan is designed, because commissionable MRR and net new MRR are almost never the same number, and finance models built on the second will under-budget the first. The other structural point about MRR as a basis: it pays the same for a customer who lasts one month as for one who lasts five years. Any plan paying a multiple of new MRR needs a retention window behind it, or it is simply paying for signatures.
One month of MRR movement, and two defensible answers
A subscription business opens the month at $412,000 of MRR. Four things happen to it. The comp plan pays reps a multiple of one times the MRR they add through new business and expansion.
- Opening MRR
- $412,000
- New business
- +$38,000
- Expansion from existing customers
- +$11,500
- Contraction from downgrades
- −$6,200
- Churned customers
- −$14,300
- Closing MRR
- $441,000
- Net new MRR against commissionable MRR
- $29,000 against $49,500
The company grew by $29,000 a month. Payroll owes $49,500. Both figures are right, and a plan that never writes down which one it means will produce a budget variance every single period.
Annual prepay is where MRR plans pay twelve times too much
A customer signs for a year and pays the whole $60,000 upfront. The invoice says $60,000, the CRM opportunity amount says $60,000, and the MRR that deal represents is $5,000. If the commission plan says it pays a one times multiple of new MRR and the data pipeline hands the engine the deal amount, the rep is paid $60,000 rather than $5,000 and nobody notices until the accrual is reviewed. Define the MRR field at the source, derive it from term length, and never let a plan read whichever revenue number happens to be nearest.
- What is the difference between MRR and ARR?
- Annual recurring revenue is monthly recurring revenue multiplied by twelve. They describe the same subscription base at different scales, so a company with $441,000 of MRR has $5.29 million of ARR. Businesses with monthly contracts tend to report MRR, and businesses selling annual or multi-year agreements tend to report ARR.
- Is MRR a good basis for sales commission?
- It works well where contracts are short and renewals are automatic, because it measures exactly what the rep added to the run rate. It works badly on its own for long contracts, since paying a multiple of MRR values a one-month customer and a five-year customer identically. Plans that pay on MRR usually attach a retention window so commission on a customer who leaves quickly can be reversed.
Nearby terms
Knowing the word is
the easy half
Commish pays monthly recurring revenue (mrr) the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.