6 ms·

Congrats! On a related note, can someone on HN can educate me on why MRR is the primary metric? MRR doesn't tell you if the startup is profitable, which is pres

Congrats! On a related note, can someone on HN can educate me on why MRR is the primary metric? MRR doesn't tell you if the startup is profitable, which is presumably the goal - to make money. If your costs are $3M/month, an MRR of $100K sounds like a terrible deal. Wouldn't it make more sense to report profits?

mikesabat 4y ago
Generally agree with the sentiment, but here is likely why we continue to talk about MRR. 1. It's likely inherited from how investors look at startups. They are just focused on growth more than profitability. 2. In the US there are tax advantages to running costs through the business so these costs might be inflated and profit artificially reduced.
- giantg2 4y ago
  And with software a lot of your costs and overhead are fairly fixed. So as you scale up, more of your revenue becomes profit. Investors are looking at that future scaled up state.
gdsdfe 4y ago
MRR gages whether or not people are willing to spend money for the product/service how this MRR evolves over time and how much it is gives also an idea about growth and the 'demand' side of things in general
draaglom 4y ago
As long as you believe you can acquire customers for some margin less than (you project) they will pay you across their lifetime as a customer, the rational choice to to maximise your money is to spend all the money you have (and more!) on acquiring more customers. As a result, the majority of SaaS businesses aren't profitable, and people talk mostly about MRR.
baby 4y ago
for others like me who might not have known: > Monthly Recurring Revenue (MRR) is the income that a company expects to receive in payments on a monthly basis. MRR is a critical revenue metric that helps subscription companies to understand their overall business health profitability by keeping a close eye on monthly cash flow.
moralestapia 4y ago
One-person software shops usually have recurring costs close to zero, so MRR pretty much equals profit (minus taxes and whatever). But yes, your argument stands for other kinds of startups.
- brianwawok 4y ago
  I'd assume a few thousand for servers + softwares, but yah.. it's close enough to $0 you can usually tell if it's profitable. Unlike something like e-commerce where 100k in monthly sales could be... 0 profit, or 70k in profit.
  - XCSme 4y ago
    Unless it's a data-intensive service, the servers+software costs are under a few hundreds. Source: I sell self-hosted software, my costs are mostly the domain names and a few $5/mo servers.
    - brianwawok 4y ago
      Cool. Glad you took the time to correct me. I run a SaaS and spend a few thousand per month for my hardware and software. And I wouldn’t want to spend any less and reduce my footprint,
      - __pache__ 4y ago
        why do you have to spend a few thousand?
        brianwawok 4y ago
        Why not? Zendesk alone is over 1k. You can use a fake help desk software for half, but is it worth screwing with the bugs? My CPU load is something like 200 CPUs 24/7, and needs to be fault tolerant on top of that. Also needs to run without a sysadmin on my side.
quickthrower2 4y ago
For this sort of business fixed and variable costs are low (he is doing it for free, kind of)
- baxtr 4y ago
  This really depends on how you acquire customers.
muzani 4y ago
I don't think anyone has answered the question yet. Revenue/cost = profit margin. There's usually three ways to increase profit margin: economics of scale (sell more units), economy of scope (sell more to the same customers), or innovation (lower cost/increase prices) All these three are usually linked to revenue in some way. 3 customers and 3000 customers may be roughly the same hosting cost. If you can sell someone a $100 item, you can sell them a $1000 plan later or simply a $1 item for very little marketing fees. Or if you're outsourcing something that could be built in house, it makes sense to hire a team to build and maintain that process once the cost gets high enough to justify new hires. The other more common answer is revenue is hard to manipulate, while profits are very easy. Buy and furnish a new office and then your cost suddenly hits $3m that month. Anyone who takes any kind of venture capital is expected to have negative profits. They can hire contractors, outsource social media marketing to agencies, outsource hiring contractors to agencies, and so on. Uber used to buy cars and then sell them to their drivers, to get more drivers. Grab gave out free phones so taxi drivers could download the app. Startups aren't about profits, they're about growing an asset as fast as possible and then selling it off to someone who can utilize same asset for higher value. e.g. YouTube and WhatsApp don't bring in money themselves, but work very well into Google and Meta strategically. It's also common to seed "marketing cost" into unsustainable coupons/discounts and such. That's unhealtht revenue, but it's also why unit economics (the cost of one unit sale) is another metric. Turns out it's bloody difficult to fix unit economics. But this is why people check that unit economics are positive and then read MRR.
leandot 4y ago
Because revenue is hard to fake, while a lot of the other metrics are easy. For example, a manager could cut costs via layoffs, get their bonus because the profitability increases in the short term and then they would leave to the next company. The old company may die as it has lost talent, knowledge and motivation in the long run. Doing these kind of tricks with revenue is much harder to pull off.
joshxyz 4y ago
Because mrr proves the the market exists. And in saas area it is assumed to be in healthy profit margin, compared to other areas. In saas operating costs can be reduced, marketing can be scaled, churn can be reduced - but all of these require demand for your product.
v8xi 4y ago
Had to find the article, but I recently read this: https://commoncog.com/cash-flow-games/ https://commoncog.com/cash-flow-games/ talks about the guy who invented EBITDA and I found it super informative. Explains WHY profit is a bad measure and why cash flow rules.

mikesabat 4y ago

Generally agree with the sentiment, but here is likely why we continue to talk about MRR. 1. It's likely inherited from how investors look at startups. They are just focused on growth more than profitability. 2. In the US there are tax advantages to running costs through the business so these costs might be inflated and profit artificially reduced.

giantg2 4y ago
And with software a lot of your costs and overhead are fairly fixed. So as you scale up, more of your revenue becomes profit. Investors are looking at that future scaled up state.

gdsdfe 4y ago

MRR gages whether or not people are willing to spend money for the product/service how this MRR evolves over time and how much it is gives also an idea about growth and the 'demand' side of things in general

draaglom 4y ago

As long as you believe you can acquire customers for some margin less than (you project) they will pay you across their lifetime as a customer, the rational choice to to maximise your money is to spend all the money you have (and more!) on acquiring more customers. As a result, the majority of SaaS businesses aren't profitable, and people talk mostly about MRR.

baby 4y ago

for others like me who might not have known: > Monthly Recurring Revenue (MRR) is the income that a company expects to receive in payments on a monthly basis. MRR is a critical revenue metric that helps subscription companies to understand their overall business health profitability by keeping a close eye on monthly cash flow.

moralestapia 4y ago

One-person software shops usually have recurring costs close to zero, so MRR pretty much equals profit (minus taxes and whatever). But yes, your argument stands for other kinds of startups.

brianwawok 4y ago
I'd assume a few thousand for servers + softwares, but yah.. it's close enough to $0 you can usually tell if it's profitable. Unlike something like e-commerce where 100k in monthly sales could be... 0 profit, or 70k in profit.
- XCSme 4y ago
  Unless it's a data-intensive service, the servers+software costs are under a few hundreds. Source: I sell self-hosted software, my costs are mostly the domain names and a few $5/mo servers.
  - brianwawok 4y ago
    Cool. Glad you took the time to correct me. I run a SaaS and spend a few thousand per month for my hardware and software. And I wouldn’t want to spend any less and reduce my footprint,
    - __pache__ 4y ago
      why do you have to spend a few thousand?
      - brianwawok 4y ago
        Why not? Zendesk alone is over 1k. You can use a fake help desk software for half, but is it worth screwing with the bugs? My CPU load is something like 200 CPUs 24/7, and needs to be fault tolerant on top of that. Also needs to run without a sysadmin on my side.

quickthrower2 4y ago

For this sort of business fixed and variable costs are low (he is doing it for free, kind of)

baxtr 4y ago
This really depends on how you acquire customers.

muzani 4y ago

I don't think anyone has answered the question yet. Revenue/cost = profit margin. There's usually three ways to increase profit margin: economics of scale (sell more units), economy of scope (sell more to the same customers), or innovation (lower cost/increase prices) All these three are usually linked to revenue in some way. 3 customers and 3000 customers may be roughly the same hosting cost. If you can sell someone a $100 item, you can sell them a $1000 plan later or simply a $1 item for very little marketing fees. Or if you're outsourcing something that could be built in house, it makes sense to hire a team to build and maintain that process once the cost gets high enough to justify new hires. The other more common answer is revenue is hard to manipulate, while profits are very easy. Buy and furnish a new office and then your cost suddenly hits $3m that month. Anyone who takes any kind of venture capital is expected to have negative profits. They can hire contractors, outsource social media marketing to agencies, outsource hiring contractors to agencies, and so on. Uber used to buy cars and then sell them to their drivers, to get more drivers. Grab gave out free phones so taxi drivers could download the app. Startups aren't about profits, they're about growing an asset as fast as possible and then selling it off to someone who can utilize same asset for higher value. e.g. YouTube and WhatsApp don't bring in money themselves, but work very well into Google and Meta strategically. It's also common to seed "marketing cost" into unsustainable coupons/discounts and such. That's unhealtht revenue, but it's also why unit economics (the cost of one unit sale) is another metric. Turns out it's bloody difficult to fix unit economics. But this is why people check that unit economics are positive and then read MRR.

leandot 4y ago

Because revenue is hard to fake, while a lot of the other metrics are easy. For example, a manager could cut costs via layoffs, get their bonus because the profitability increases in the short term and then they would leave to the next company. The old company may die as it has lost talent, knowledge and motivation in the long run. Doing these kind of tricks with revenue is much harder to pull off.

joshxyz 4y ago

Because mrr proves the the market exists. And in saas area it is assumed to be in healthy profit margin, compared to other areas. In saas operating costs can be reduced, marketing can be scaled, churn can be reduced - but all of these require demand for your product.

v8xi 4y ago

Had to find the article, but I recently read this: https://commoncog.com/cash-flow-games/ https://commoncog.com/cash-flow-games/ talks about the guy who invented EBITDA and I found it super informative. Explains WHY profit is a bad measure and why cash flow rules.