Definition

monthly recurring revenue (MRR)

Contributor(s): Spencer Smith

Monthly recurring revenue (MRR) is income that a company can reliably anticipate every 30 days.  

Both the managed services and cloud services business models have MRR as a key component. In the managed services model, the managed service provider (MSP) collects recurring revenue by managing clients' IT systems for a fixed monthly fee. The monthly fee can cover a range of agreed-upon services under an outsourcing agreement -- such as mobile device management or managed print services -- that the MSP delivers to the client. The monthly fee is specified in the managed service contract between the MSP and client.

For IT solution providers, there are several benefits that are commonly associated with a recurring revenue model, especially when compared with transactional models. A solution provider that creates MRR streams can achieve a steady cash flow, which can protect the company's bottom line more consistently than if the company were subject to fluctuating project-related business. Additionally, an MRR cash flow can provide a better handle on budgetary objectives than would be possible for companies that only carry out transactional business. Budget-wise, clients also can benefit from paying a fixed fee instead of variable and sometimes unpredictable IT expenses. IT solution providers can derive monthly recurring revenue (MRR) from a number of sources, such as license renewals; service, support and maintenance contracts; and Software-as-a-Service and Infrastructure-as-a-Service subscriptions. MRR excludes one-time or adjustable fees as well as one-time product sales.

While the advantages of the recurring revenue model and MRR streams may appeal to transaction-based value-added resellers and other solution providers, companies that decide to transition to an MRR-based model such as managed services -- or add MRR to their existing revenue model -- can be faced by a number of challenges. A transaction-based company that shifts to a managed services model must sign up a high volume of managed services customers to make up for revenue the company would have otherwise brought in from hardware/software sales or project work. Transitioning can often demand that companies streamline their technical operations, determine a pricing strategy and restructure their sales teams. In many cases, companies retain their legacy line of transactional business while gradually switching over into the new line of recurring revenue business.

 

This was last updated in October 2014

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