The Two Sided Coin of Saas Metrics (Part 2): An Advanced Guide to Calculating CMRR

Committed Annual Recurring Revenue & Committed Monthly Recurring Revenue are not ‘essential’ metrics for your Saas business, but tracking them might give you valuable insight into your business. It is not a formal ‘financial metric’ so there is some flex in how you interpret it. That said, I’ve given you my interpretation as someone who ran the operations and finances of a technology Saas company.

I found it had many advantages, both in representing progress in sales when the contracts actually signed, as well as a more stable basis to examine the metrics and upcoming financials of the business.

In this article, we will cover what CMRR and CARR mean, the advantages and disadvantages, how to track them and how to increase them.

As in the first article on NRR in this series on advanced metrics, it is hard to produce an article on a metric for a company without inadvertently showing how to manipulate that metric.

Definition of Committed Annual Recurring Revenue & Committed Monthly Recurring Revenue

Committed Monthly Recurring Revenue (CMRR) and Committed Annual Recurring Revenue (CARR) is the total amount of recurring revenue that your customers are currently committed to. It is usually seen as a more ‘forward looking metric’ than MRR & ARR alone.

This is because while MRR & ARR are the recurring portion of the revenues that a company is taking to its income statement, CMRR attempts to take additional information into account that hasn’t yet hit the income statement. For example, if you have just signed a client who starts next month – CMRR would allow you to report that as CMRR this month. Founders & CEOs usually like this aspect of CMRR, as it allows them to show progress to investors & colleagues in a numbers format – when they would usually be unable to.

In equation form, you could write it as the following:

CMRR = Total Recurring Revenue of All Signed Order Forms at their Maximum Contractual Value – All Customers Who have Verbally Indicated they Wish to Leave your Company

Therefore, CMRR is the total recurring revenue that has been contractually committed (as in, signed order form or equivalent), excluding the value of any contracts you know that are not going to renew. It attempts to understand the future revenues of a business by taking as much known information from the current day into our reporting. This is why you include contracts that might not have started yet or pricing increases that haven’t yet occurred as well as removing brands you know are going to churn.

Relationship between CMRR & MRR

The MRR of a business always lags behind CMRR between 2 weeks and 6 months. Why is that? The answer, is that there are various reasons why a signed contract might not be paid to the business right away. These will be covered in more depth later, but this could be a difference between the Effective Date and Signed Date of the contracts, or a discount period.

Take, for example, Company A and Company B.

  • Company A: Signed a contract on the 14th February to start on the 14th February paying £1000 a month.
  • Company B: Signed a contract on the 14th February to start on the 1st March paying £1000 a month.
  • Company C: Signed a contract on the 1st February to start on the 1st February paying £1000 a month, but has two month discount.

In this example, all three companies signed for £1000 a month in the month of February. We have 3 x £1000 new committed revenue, so the total change is £3000 in CMRR.

MRR, however, is going to take some time to catchup with CMRR. Company A adds £500 to MRR in February (accruing half the days), Company B adds £0 as the contract starts the next month and Company C adds £0 in February as there is a period of discount. So the MRR change will be Month 1: £500, Month 2: £2000, Month 3: £3000.

Hopefully you can see two things, firstly, CMRR makes sense for the business to track. MRR is lagging CMRR and not much more ‘accurate’. Secondly, MRR lags CMRR by the amount of time between the signature and money arriving in the bank. The reason the standard lag is 2 weeks to 6 months, is because 2 weeks is the average amount of time that accruals takes off MRR in the first month, and 6 months is an average maximum discount period that Saas businesses give.

A few examples of how to apply CMRR are below, which will help explain the delay:

Examples of Applying CMRR & ARR

Discounts

In the case when discounts are ‘introductory’ and just apply to the first few months of a contract, you should take the full non-discounted price as the CMRR from the initial signing.

Example Disclaimer: Customer 1 has a three month 50% discount, but we booked the full amount in the month when they signed the contract.

Contracts with variable monthly costs (Case 1)

Some contracts might increase in value over the course of the annual contract. These are not labelled as ‘discounts’ but it is clearly agreed in the contract that the monthly cost will increase from, say, £1,995 to £2,995 in a certain month. Like the previous example, you should take the full non-discounted amount (£2,995) from the signing of the contract.

Example Disclaimer: Customer 2 has the first 6 months at £1,995 and the last six months at £4,995. we ‘booked’ the full £4995 when they signed the contract.

Contracts with variable monthly costs (Case 2)

Some contracts vary the monthly payment across multiple-year contracts. So, for example, a customer might start paying £1,995 in the first year and move to £2,995 in the second year of the contract. In this case, you should only take the revenue as committed in a multi-year contract if there are no opt outs, otherwise just the first year revenue.

Example: Customer 3 start on $50k USD for the first 15 months and move up to $65k in the second year, but have an opt out after year 1 & 2. We have just taken the CMRR as the $50k over 15 months (£2.4k).

Variable Contracts

Some contracts start at lower ‘basic’ pricing and move up through the tiers as usage increases. You should treat this as ‘upsells’ so do not include it as CMRR from when they sign, as there is a chance they will not increase their usage (even if they say that they will). You should then take the increase in CMRR when they increase their usage. (A good way of resolving this is specifying in the contract a period where they will go up regardless of usage, say 6 months into the contract if you want to force the issue).

Example: Customer 4 started being invoiced at 995 but agreed that they were going to launch two programs (bringing their cost up to 2295 a month from 995). We have taken 995 from the signed contract and will increase it based on when they launch the second program.

How to Increase CMRR

If you wish to make CMRR your core metric for tracking revenue (many founders and business owners will choose to do this) you must understand that this both changes the incentives of the business and enables you to increase CMRR quickly with a few changes in contract. 

Discounts

There are slightly different mechanisms that should be pulled when discounting. If you apply a flat rate discount (10%), your CMRR will be 10% lower than if you structure this as as ‘front loaded’ discount of giving an up front set of months off. If a brand has 3 months free, then 9 months at £2995 – the CMRR for that brand is £2995 CMRR as soon as the contract is signed. 

While this seems innocent enough, if sales personnel start using it too heavily, customers might be accounting for this 9 x £2995 contract as a £26,955 per annum contract. This might increase the complexity of securing a resell at the ‘same’ CMRR.

Effective Date Example

The effective date is not important for CMRR purposes (but is important for actual MRR). So if you want to discount a week or so, you could set the effective date for the first day of the next month and offer to start onboarding before then. As long as the contract is signed, you can take CMRR from that point.

Implementation & Consultancy Fees Example

Implementation and any one off fees do not show up in CMRR numbers. You can structure a discount by removing the implementation, and you will retain both your MRR and CMRR. 

As you can see, changes in discounts and contracting can significantly move the needle. However, of course, the main difference will come from closing more deals!

Conclusion

Hopefully, this has shown you how useful CMRR can be for your business. It allows you to have a metric which shows your progress in selling, before that money hits your bank account. It also has a second use, because it is so much more stable on a per customer basis than MRR, you can use it to calculate further metrics much more easily or at least avoid using MRR in two different contexts for different things.

As with Net Revenue Retention, CMRR can be affected significantly in a few nuanced ways. I would ensure that MRR doesn’t lag too far behind CMRR, as that might indicate ‘gaming’ of the metric.

If you have any more questions, please feel free to give me a shout at david@saasanalysts.com.