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The Power of Monthly Recurring Revenue for New Businesses

December 16, 20234 min read

In a new business, achieving steady revenue is a big challenge. The ups and downs of sales can make it very difficult to create a budget, understand when to hire, or estimate how much money you can take out of the business to pay yourself. It can also take time to decide what to focus on first. That is why I always recommend that new businesses set goals around monthly recurring revenue (MRR). MRR's focus solves a lot of early business problems.

The Case for MRR

I worked at a startup early in my career, and they valued MRR above all other financial metrics. It was how investors valued the company, and every department, including sales, marketing, engineering, and customer support, focused on this one metric. Each department focused on what they could do to make it easier for new clients to become happy and keep them happy for as long as possible. 

MRR grows by making new customers happy and by having a steady flow of new prospects coming in the door. It is an excellent measurement of the overall health of a business. It is built on excellent delivery of goods and services. If client churn suddenly increases, the leadership team will know they have a problem and focus on it. 

There are five main benefits of focusing on MRR:

1. It helps you budget. Budgeting becomes much easier by having a base number of sales each month. You know what the minimum amount you will earn is without having to rely on shaky sales forecasts. 

2. MRR will force you to systematize your business. From the moment a prospect first inquires about your services all the way through delivery, it must be a good experience. If it is not, customers will churn, and the MRR model breaks down. If you are good at signing new clients but need help growing MRR, you know you have a delivery problem. You can then spend your time improving your operations and customer support systems. If you are able to keep customers, but leads are a problem, you can then focus on marketing. MRR will help you determine where to spend your precious time.

3. Long-term clients are great for referrals. The longer you work with a client and the happier they are, the more likely they are to refer other companies to you. This can be a great way to grow even faster with a well-oiled marketing machine.

4. It grows goodwill. When you build a relationship with a client over a long period of time, you will also earn some goodwill. If something goes wrong, clients are much more likely to give you the opportunity to fix the issue rather than immediately choosing a different direction.

5. MRR buys your business time. When you first start a business, aspects of your business are not going to be good. You haven't had the time to build systems and learn what is most important yet. In my first year in business, I was less than stellar (terrible), but I had some clients who were patient and willing to let me fix things. They helped me stay in business while I improved. 

There is a sixth benefit of MRR, but it is more of a side effect of focusing on it—MRR will grow profits faster. The math is simple. Each month you grow MRR, you grow your annual revenue and the value of your business.

For example:

In month one, you sign two retainers for $1,000 each = $2,000/MRR

In month two, you sign two more retainers for $1,000 each, and both clients from month one stay on. You now have $4,000/MRR or 12 x $4,000 = 48,000 annual revenue.

If you are skillful, after a year or two, you can grow your MRR to hundreds of thousands a month.

MRR compounds. And if you keep your churn rates low, you will experience exponential growth. 

It is simple but not easy. Growth comes with problems all its own. Even with stellar service, it can be difficult to keep your churn rate lower than your growth rate. There is a lot that goes on inside your customers' companies, and sometimes, you will lose clients to no fault of your own. It is natural.

The good news is that by focusing on MRR, you will have the time you need to create a great experience for clients, and it will help you create extraordinary profit for your business.

Until Next Week!

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monthly recurring revenuestart up
Back to Blog
blog image

The Power of Monthly Recurring Revenue for New Businesses

December 16, 20234 min read

In a new business, achieving steady revenue is a big challenge. The ups and downs of sales can make it very difficult to create a budget, understand when to hire, or estimate how much money you can take out of the business to pay yourself. It can also take time to decide what to focus on first. That is why I always recommend that new businesses set goals around monthly recurring revenue (MRR). MRR's focus solves a lot of early business problems.

The Case for MRR

I worked at a startup early in my career, and they valued MRR above all other financial metrics. It was how investors valued the company, and every department, including sales, marketing, engineering, and customer support, focused on this one metric. Each department focused on what they could do to make it easier for new clients to become happy and keep them happy for as long as possible. 

MRR grows by making new customers happy and by having a steady flow of new prospects coming in the door. It is an excellent measurement of the overall health of a business. It is built on excellent delivery of goods and services. If client churn suddenly increases, the leadership team will know they have a problem and focus on it. 

There are five main benefits of focusing on MRR:

1. It helps you budget. Budgeting becomes much easier by having a base number of sales each month. You know what the minimum amount you will earn is without having to rely on shaky sales forecasts. 

2. MRR will force you to systematize your business. From the moment a prospect first inquires about your services all the way through delivery, it must be a good experience. If it is not, customers will churn, and the MRR model breaks down. If you are good at signing new clients but need help growing MRR, you know you have a delivery problem. You can then spend your time improving your operations and customer support systems. If you are able to keep customers, but leads are a problem, you can then focus on marketing. MRR will help you determine where to spend your precious time.

3. Long-term clients are great for referrals. The longer you work with a client and the happier they are, the more likely they are to refer other companies to you. This can be a great way to grow even faster with a well-oiled marketing machine.

4. It grows goodwill. When you build a relationship with a client over a long period of time, you will also earn some goodwill. If something goes wrong, clients are much more likely to give you the opportunity to fix the issue rather than immediately choosing a different direction.

5. MRR buys your business time. When you first start a business, aspects of your business are not going to be good. You haven't had the time to build systems and learn what is most important yet. In my first year in business, I was less than stellar (terrible), but I had some clients who were patient and willing to let me fix things. They helped me stay in business while I improved. 

There is a sixth benefit of MRR, but it is more of a side effect of focusing on it—MRR will grow profits faster. The math is simple. Each month you grow MRR, you grow your annual revenue and the value of your business.

For example:

In month one, you sign two retainers for $1,000 each = $2,000/MRR

In month two, you sign two more retainers for $1,000 each, and both clients from month one stay on. You now have $4,000/MRR or 12 x $4,000 = 48,000 annual revenue.

If you are skillful, after a year or two, you can grow your MRR to hundreds of thousands a month.

MRR compounds. And if you keep your churn rates low, you will experience exponential growth. 

It is simple but not easy. Growth comes with problems all its own. Even with stellar service, it can be difficult to keep your churn rate lower than your growth rate. There is a lot that goes on inside your customers' companies, and sometimes, you will lose clients to no fault of your own. It is natural.

The good news is that by focusing on MRR, you will have the time you need to create a great experience for clients, and it will help you create extraordinary profit for your business.

Until Next Week!

Custom HTML/CSS/JAVASCRIPT
monthly recurring revenuestart up
Back to Blog