Measuring Contracted Monthly Recurring Revenue

Contracted Monthly Recurring Revenue (CMRR)refers to value of a portion of contracted subscription revenue. Even in SaaS, it closely relates with Committed Monthly Recurring Revenue and in some businesses, these metrics are mostly identical. The contrast is that Contracted Monthly Recurring Revenue contains only revenues that are contractually guaranteed. Term-based subscription businesses, such as SaaS, recognize this portion of subscription revenue each month. Revenues that are not recurring are excluded even if they are on a revenue recognition schedule. Also typically excluded are variable fees.

Contracted Monthly Recurring Revenue Definition for SaaS

For non-term based (month-to-month) businesses, Contracted MRR is the minimum contracted element of the service fee charged in products and services such as Software-as-a-service. For instance, if you pay $30 per month for maintenance and $0.0195 for every transaction, then Contracted MRR includes the $30 and excludes fees for all transactions.

For C-level execs, including organizations that adopt CMRR as a key operating and board-level metric, CMRR is perhaps the most important SaaS metric of all. Generally, a common concept is that CMRR is a measure of your subscription business components of predictable and recurring revenue, which will typically exclude variable and one-time fees, but month-to-month businesses could include these items.

Most importantly, CMRR’s value does not come from a single number per se, but the momentum surrounding the components of the CMRR of your company such as CMRR for renewals, CMRR for new sales, CMRR for upgrades, and CMRR losses, or revenue churn.

Just like for most, there is no one known definition for CMRR. In fact, it is possible to have a major confusion over the term itself and measurement of CMRR, as it feels and sounds like revenue (especially in the context of SaaS revenue recognition). On the contrary, Monthly Recurring Revenue is not revenue and its calculation is very different, often causing confusion and turmoil in a company’s finance department, the group considered experts in calculating and reporting CMRR. Therefore, it is up to your organization that uses SaaS to establish the definition of CMRR, including the rules for calculating key components.

Calculating CMRR for a Monthly Subscription Business

There is a significant difference between calculating CMRR for a monthly subscription business and a term subscription business. Using a term subscription model, calculation of CMRR growth is done using a monthly value that is derived by normalizing a contract transaction. For example, a $2400 annual subscription has a monthly value of $200.

Apparently, the normalized value is not derived from actual revenue schedules that could include “noise” because of the revenue recognition rules and methods utilized. The normalization value is nothing more than a representation of the monthly value of an element of a contract in the life of the subscription. The bad news is that you cannot just pull it from your finance system; you have to calculate this figure. In calculating CMRR in a monthly subscription model, you utilize actual billed, invoiced, and paid fees, meaning you can use actual transactions from the finance system that your department uses or just raw transactions from a credit card processor.

Even though the data sources may differ significantly, the format of the CMRR growth report is the same. And to communicate vital information about performance, distinct buckets are used to report CMRR growth. As you would see, the CMRR from actual transactions would be reported by CMRR from Upgrades/Upsells/Increases (net positive), CMRR gained from new accounts, CMRR lost from cancellations/loss/non-renewals, and CMRR lost from downsells/downgrades or net negatives.

Distinctive Features of the CMRR Report

Since the CMRR report is not simply a display of revenue by period in which you could just produce and use a typical income statement, there is need to segment the sources of gains/ losses, creating the significant problems in calculation of CMRR growth for monthly subscription SaaS businesses.

Unfortunately, transaction management and financial management systems do not relate the processed transactions to each other, but only to the customer. In fact, it is the interrelationship of a client’s monthly transactions enabling the measurement of net negative and net positive changes. In addition, traditional finance systems do not identify new transactions present in a subscription stream and do not indicate/store the presence of a typical cancellation. However, if typically captured, it is done so only within the admin and provisioning module of your application/subscription system, not the finance system.

There are no restrictions on what can be included in Contracted Monthly Recurring Revenue. For term-based subscription services, variable may or may not be included in the revenue even if customers are contractually obliged to pay. The CMRR acts as the baseline value of service for monthly subscription businesses (with no term contract). With these businesses, no rules exist to guide calculation of the CMRR. If customers do not have to pay setup or commitment fee, you may use the history of their payments as the CMRR. In addition, CMRR projects a better picture of the health of a SaaS business than MRR.

CMRR vs. MRR – Which one should be used in Calculating Revenues?

MRR is the total revenue a business expects from customers every month. Assuming a SaaS business has 1,000 clients and charges $25 per month, the MRR of that particular business will be $25,000. The total MRR is all revenues generated to the business per month. However, CMRR paints a better picture of the financial strength of a SaaS company than the MRR, as it considers the anticipated churn during the entire period under review. Moreover, MRR does not factor the expected cancellations, downgrades, or upgrades, giving a gross overview of the revenues.

Conclusion

If there is a high percentage of churn, a SaaS company relying exclusively on Monthly Recurring Revenue to forecast its revenues may greatly be disappointed. On the other hand, companies that use CMRR when forecasting revenues may get a true picture of their financial standing. While traditional software vendors have income statements that look backwards without differentiating between onetime- and recurring fees, SaaS companies have to get their CMRR metrics right to determine their true financial standing. SaaS startups have to greatly rely on various metrics to gain a basic understanding of their financial performance. Contracted Monthly Recurring Revenue is one of the metrics often used in developing a product.

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Omri Erel
Omri is the Head of Demand Generation, as well as the Lead Author & Editor of the SaaSAddict Blog. Omri established the SaaSAddict blog to create a source for news and discussion about some of the issues, challenges, news, and ideas relating to SaaS and cloud migration.
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