Question: Can I include revenue that is highly predictable and consistent from my clients in my monthly recurring revenue (MRR) metric, even if it is not contractually guaranteed (e.g. it’s not a set, recurring rate each month)?
Answer: Whether you should include highly predictable and consistent revenue from your clients in your monthly recurring revenue (MRR) metric, even if it is not contractually obligated, is a nuanced question. There are arguments for and against doing so, and the best approach may depend on your specific business and circumstances. In my opinion, in most cases you can (and should) include it, so long as you are transparent and have a definition of the different revenue or service items that combine to produce the final MRR.
Arguments for including the revenue:
- Predictability: If the revenue is truly highly predictable and consistent, it can be seen as a reliable source of income that contributes to your business’s stability and growth. Including it in your MRR can provide a more accurate picture of your recurring revenue stream.
- Transparency: Some investors and stakeholders may prefer to see all predictable sources of revenue reflected in your MRR, even if they are not contractual. This can improve transparency and provide a more complete understanding of your business’s financial health.
- Motivation: Including non-contractual revenue in your MRR can incentivize your team to focus on maintaining and growing these relationships, as it will directly impact a key performance metric.
Arguments against including the revenue:
- Accuracy: If the revenue is not guaranteed by a contract, it could be subject to unforeseen changes or cancellations. Including it in your MRR could overstate your true level of recurring revenue and lead to inaccurate forecasts.
- Misleading impression: Some investors or stakeholders may misinterpret non-contractual revenue as being as secure as contractual revenue, which could lead to unrealistic expectations.
- Dilution of focus: Focusing on growing non-contractual revenue might draw attention away from efforts to secure more stable, contractual recurring revenue streams.
Ultimately, the decision of whether to include non-contractual revenue in your MRR is a judgment call. Here are some things to consider:
- The level of predictability of the revenue: How confident are you that the revenue stream will continue in the future?
- The expectations of your stakeholders: How will investors and other stakeholders interpret the inclusion of non-contractual revenue?
- Your overall business strategy: Does including this revenue align with your long-term goals for recurring revenue growth?
Some additional tips:
- If you do decide to include non-contractual revenue in your MRR, be sure to clearly disclose this to stakeholders and explain the reasoning behind your decision.
- You may want to track non-contractual revenue separately from contractual revenue so you can monitor its performance and impact on your overall MRR.
- Consider using additional metrics, such as churn rate and customer lifetime value, to provide a more comprehensive picture of your recurring revenue health.