Monthly Recurring Revenue (MRR): The business cheat code and how to get it

Monthly Recurring Revenue (MRR) is a business cheat code. Here is why every B2B SaaS company, investor, and founder is chasing recurring revenue. And why you should to.

MRR is something all SaaS companies like Netflix, HubSpot, and Salesforce want because it means revenue keeps on coming from every user, every month. This makes business easy to predict and manage - in turn leading to a more attractive case for investors and higher valuations.

Most founders of SaaS companies eventually want an exit. When the time comes the value of the business is determined by the amount of benefits of acquiring the business - and the risk it takes to reap these benefits.

Having recurring revenue on monthly or annual basis makes it easy for investors or acquirers to calculate the value of the business. Typically, such a valuation is done on annual recurring revenue (ARR) - ie. the annualized monthly recurring revenue of your business.

SaaS valuations based on recurring revenue (ARR multiple) vs. rating

This means for every $ you charge your user (on a recurring basis), an investor or other company will be able to pay up to 10X the money for your SaaS - ie. the value of your company can increase by $10 for every $1 you add in revenue. That is the magic of SaaS!

As we have seen - SaaS with recurring revenue can sell for X10 revenue multiples as they are highly scalable, not dependant on the people in them, and predictable as revenue is recurring.

For consultant firms or agencies there is typically a x1 or maybe x1.5 multiple - as these are highly dependent on the people working in the companies, scale linearly as you add more employees (not beyond what they can output / charge for in a work week), and most importantly - do NOT have recurring revenue. Well, at least most of the time.

Recurring Revenue in the form on monthly (MRR) or annual (ARR) basis is the magic component of SaaS companies. It makes business predictable ie. easy to run and scale, but also attractive to investors and buyers. This is why SaaS beats all other forms of business like agencies.

Obsessing over MRR is something all SaaS founders should do. Keep MRR as one of your main KPI:s and you will be on to a growth journey towards a healthy predictable business - and a big exit multiple down the line.