Last editedMar 20232 min read
If you’re running a SaaS company or you’re interested in moving into the SaaS space, a significant proportion of your revenue is likely to be classed as “recurring”. Affording businesses a greater level of stability and predictability when it comes to their finances, SaaS recurring revenue models are increasingly attractive to businesses, which is part of the reason why we’ve seen such an explosion of software-as-a-service start-ups over recent years. But before you get onto the ins and outs of subscription management, it’s important to understand the basics of SaaS recurring revenue in a little more depth. Check out our guide to SaaS recurring revenue, right here.
What is recurring revenue?
While there is a broad range of SaaS pricing models and strategies, almost all revenue associated with SaaS falls into the category of recurring revenue. So, what is SaaS recurring revenue? Recurring revenue refers to revenue that is very likely to continue in the future. In the context of SaaS businesses, recurring revenue is revenue from customer subscriptions. This revenue is considered to be stable and predictable, enabling subscription-based businesses to generate consistent revenue month after month and scale towards a successful IPO, merger, or acquisition. SaaS recurring revenue is generally measured as either monthly recurring revenue (MRR) or annual recurring revenue (ARR). We’ll explain a little more about these crucial SaaS metrics later in the article.
Why is recurring revenue important for SaaS businesses?
Software used to be a one-time purchase (referred to as a “perpetual license”). While customers would own the software in perpetuity, the costs and complexity of deploying and maintaining the software could exclude small-to-medium size businesses from investing in certain software packages. SaaS changed all this. Now, software is accessed over the internet and customers pay a monthly, quarterly, or annual fee to essentially “rent” the software. This is highly attractive to customers, since they no longer have to worry about the cost of maintenance and hardware. However, SaaS recurring revenue models are also attractive to businesses due to the predictability of revenue associated with this type of business model.
What is MRR and how do you calculate it?
MRR stands for monthly recurring revenue. This refers to the amount of revenue that your company will book over the course of a month. To calculate monthly recurring revenue in SaaS, you’ll need to take into account a variety of factors, including the length of the contract, the number of days in each month, and any mid-term contract changes, renewals, or upgrades. Because of these variances, it’s best to calculate MRR at the contract level. It’s important not to mess up your MRR calculations, since other vital metrics like MRR churn rely on this figure being accurate. However, if you know the total contract value (TCV), you can divide by the number of months on the contract for a rough figure.
MRR = TCV / No. Contract Months
What is ARR and how do you calculate it?
ARR stands for annual recurring revenue. It refers to the annual value of the recurring elements of your business’s revenue. Calculating annual recurring revenue in SaaS is simple – you simply multiply your MRR by 12. If you don’t have the figure for MRR yet, you can determine the total contract value (TCV) and divide it by the number of months on the contract (remember, this may not necessarily be 12, as contract terms are not always annual). Then, multiply that number by 12 to calculate the ARR.
ARR = MRR x 12
ARR = (TCV / No. Contract Months) x 12
How can GoCardless help with SaaS recurring revenue?
GoCardless is a payments platform that enables businesses to collect payment directly from their customers’ bank accounts, making it an ideal solution for businesses using a SaaS recurring revenue model. Integrating with over 300 partners, we can help you automate your billing and invoicing workflows, saving time and money. Plus, when you’re ready to take your SaaS product global, GoCardless can assist with a localized international payment experience in 30+ countries.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.