To access their financial status, SaaS Startups employ different metrics, and an example of such metrics is the CMRR. While you might have heard VCs mention it or you do know about the CMRR, but you may not know that it is among the best metrics for SaaS companies. In this post, we discuss the CMRR, why it is most useful in the Saas Sphere, etc.

What is CMRR?

The CMRR is full for Contracted Monthly Recurring Revenue. It is also called the Committed Monthly Recurring Revenue. It can be said to be the amount of the recurring part of subscription revenue. Tough, there are no set rules on what can be incorporated into the metrics; the addition of data from the monthly recurring revenue (MRR), Churn and bookings are most popular among SaaS firms.

Hence, it can be defined as a forecast of MRR over a future period, modified to consider any guaranteed revenue expansion or anticipated churn during that period.

CMRR is the foundation for SaaS companies that sells monthly subscriptions, and since there are no set rules, in the absence of commitment fees, you can utilize the records of their payments as your CMRR.

However, for SaaS that sells annual contracts, you can calculate the CMRR as a CARR number (committed annual recurring revenue).

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The CMRR Formula 

From the definition, the CMRR mathematically calculated is;

CMRR = MRR + Guaranteed Expansion (Bookings)

Anticipated Downgrade and Churn.

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Bookings vs. CMRR/MRR

To understand the advantage of MRR and CMRR over the traditional way of measuring financial performance, we need to know what ‘booking’ is. 

Booking is an executed software contract that commits a customer to buy a subscription and commits the SaaS firm to deliver the said service. Using bookings to determine revenue as it is in the traditional vendor business is flawed. For example;

l MR Blue signs a contract of $600 for a year subscription.

l MR Red signs a contract of $1500 for 3 years subscription.

Though it may look as if Mr. Red is bringing more money to the firm, he is not because if via recurring revenue Mr blue pays $600 × 3 years, it will be greater than Mr. Red’s 3-year contract. This example shows why booking is important to MRR and CMRR and is not a revenue index.

Differences Between MRR and CMRR

  • The distinction between MRR and CMRR is that the CMRR is highly good for reducing recurring revenues from downgrades and cancellations. MRR, on the other hand, does not consider downgrades and cancellations. Hence, it only provides a simple gross overview of the revenues.
  • CMRR is a predictive model that incorporates future modifications in recurring revenues, while MRR gives insights into the current state of the SaaS company.

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MRR or CMRR, Which Is Best to Be Used in Calculating Revenues?

Let’s look at some examples of the calculations of both the CMRR and MRR when used in calculating revenues.

Suppose your SaaS business has 100 customers, with each paying $100 per month on subscriptions. Let us assume that the guaranteed MRR upgrade for the next month is $1500, and there is an expected churn of $200. 

The SaaS company’s CMRR for the next month is calculated as;

$10,000 ＋$1500

$2000 = $9,500

Here, the value of the revenue is $9,500

If your SaaS company has the same number of 100 customers and prices the same $100 each month, using the MRR alone will change the revenue. The Company’s MRR calculation will be 100 × $100 = $10,000. It is gotten by calculating all the revenues made each month to the business. 

From the example, you can see that the CMRR gives a greater understanding of the performance of the SaaS business. The reason is that it considers the churn rate, upgrades, and downgrades in its calculations. MRR does not do take in these important factors.

In a situation where a SaaS company relies entirely on the MRR to know its revenues, and there is the occurrence of a large amount of churn, it may find itself to be at a critical point later on.

Hence, SaaS companies should ensure to employ CMRR to get the accurate prediction of their revenue. This use will give them an enhanced evaluation of their financial performance.

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Why is CMRR Important?

  • CMRR measures the net outflow and inflow of subscriptions for your SaaS business. It lets you know whether you are moving MRR up or down and gives you the true value of your revenues.
  • The variables and factors in CMRR give a clear insight on when and how your recurring revenue came about and how it was lost (cancellations).
  • It also removes the non-factual revenue value given by MRR.
  • CMRR also lets you know how much your churn rate is affecting your financial performance.
  • With the CMRR, you can track your bookings. These bookings include all the bookings from new and old businesses (clients), cancellations and downgrades.
  • It is the CMRR data that most investors in the sphere want to look at. So, when you get more value in the form of a higher CMRR, it will help you if you are looking to expand and search for new investors.

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These reasons are why the CMRR is quintessential for your SaaS business and why you should start today to use it to get a better assessment of the revenue of your SaaS Business.