Having high-quality products, services, and a strong marketing tactic is crucial for running a successful business. But it’s also wise to keep an eye on your financial metrics.
You are what you measure, and your beginning of the year sales set the tone for your monthly recurring revenue.
What is Monthly Recurring Revenue?
A monthly recurring revenue (MRR) is your total recurring revenue averaged into a monthly amount. By averaging your different pricing plans and billing intervals, you can track trends over time.
Based on income, MRR provides an up-to-date picture of the company’s health. Calculating MRR is beneficial for all types of businesses, but especially those in the SaaS, subscription, and rental industry.
MRR = number of customers X average billed amount
Click HERE to use an MRR Calculator.
Bonus Tip: To calculate your Annual Recurring Revenue (ARR), merely multiply your Monthly Recurring Revenue by 12.
Why Should You Measure MRR?
Financial growth depends heavily on recurring revenue, which makes MRR so important. Calculating MRR can help you grow your company, improve customer satisfaction, and motivate your sales team. Check out the top 3 reasons you should measure MRR below.
By analyzing the total MRR, sales managers can get a true picture of how their team is doing, and make accurate sales predictions.
Using MRR, business leaders know how much money is coming in every month that can be reinvested. You can also identify any trends in MRR over time that might indicate financial difficulty if you’re having financial difficulties. On the other hand, MRR can also be a motivating factor for your sales team to hit their goals.
Using MRR, salespeople can evaluate the size of the accounts they handle. A salesperson who is struggling to hit their MRR in a given month may look back at past deals and change their tactics. Using MRR, salespeople can track their progress, analyze data, and ultimately close more deals.
Applying the Rule of 78
Another beneficial calculation that businesses can gain from is the rule of 78. For businesses that charge recurring, monthly fees, the rule of 78 is used to estimate their revenue for a calendar year. Businesses often use it to modify billing options, determine the need for new revenue streams, enhance financial stability, and establish sales quotas.
Rule of 78 Formula
Monthly Revenue X 78 = Projected Annual Revenue
So, where does the number 78 come from? Essentially there are 78 months worth of revenue in a year. How? It’s simple, assume there is 1 new recurring sale per month. Meaning January=1, February=2, March =3, and so forth. When added all up, you get 78.
How does the rule of 78 apply to MRR? It is the key number needed to predict the MRR.
How the Rule of 78 Can Benefit Your Business
As each fiscal or calendar year begins, the Rule of 78 helps you estimate how much your company needs to generate in monthly sales to meet its goals. In addition, you can use the rule of 78 to design sales quotas. To achieve your sales goal for the year, you can easily calculate how much each member of the sales team should bring in each month based on the rule of 78.
Rule of 78 in Practice
- Example #1: Storage Container Business
- You can use the equation to calculate various types of recurring income. Say you own a storage container business, you’ll know the hard numbers of how many 20-foot and 40-foot containers you need to rent to buyers each month to meet your sales goal.
- Example #2: Forklift Business
- If you run a forklift business, you’ll know how many new manufacturing facilities you’ll need to sign up for each month.
For a visual explanation, check out the infographic below:
Why is MRR and the Rule of 78 Crucial Early in the Year?
The beginning of the year sets the tone for your monthly recurring revenue. While seasons and months have a great impact on B2B sales, the beginning of the year has the highest conversion rates than any other time for B2B sellers and it should be taken advantage of.
Why is this important for MRR? Because it helps with your “Expansion MRR” which is the additional monthly recurring revenue from your existing customers (upgrades, upsells, or cross-sells).
Other Types of MRR:
- New MRR: Revenue generated from brand new customers each month.
- Churn MRR: Revenue lost because of cancellations or downgrades.
- Net New MRR: Your gain or loss in MRR.
- Net New MRR Formula: New MRR + Expansion MRR – Churned MRR
Applying the Rule of 78 to Your Business at the Start of the Year
The Rule of 78 is a perfect example of why salespeople are so busy at the beginning of the year. Those who understand the Rule of 78 know that January will have 12 months of billing for the year, whereas sales made in October will only have 3 months of billing in the year. Meaning sales made in January are worth more than sales made in any other month.
Adjusting the Rule of 78
While the rule of 78 applies to the amount of revenue you’ll gain over a full year, the formula still applies for shorter periods.
If you’re trying to build a 6-month sales plan instead of the rule of 78 you’d use the rule of 21.
How to Improve Your MRR
- Offer More Pricing Options
- Improve and Expand Products and Services
- Focus on Customer Retention
- Work with a Lead Generation Company
Interested in Generating More Sales?
360Connect helps suppliers establish quality connections with buyers. Get a steady stream of qualified prospects, grow your business, and improve your MRR with our help.