MRR and ARR are the two most commonly cited revenue metrics in subscription businesses. They sound simple, but they are often calculated inconsistently, which causes confusion when comparing across companies or communicating with investors.
MRR: Monthly Recurring Revenue
MRR is the normalized monthly revenue from all active subscriptions. It represents the predictable, recurring portion of revenue as if every customer were on a monthly plan.
MRR = Sum of (customers in each plan × monthly price of that plan)
For annual subscribers, convert to monthly by dividing the annual price by 12:
Annual subscriber paying $240/year contributes $20/month to MRR
What MRR is not: one-time fees, setup charges, professional services, or usage-based revenue that varies month to month. Those are real revenue but they are not recurring, and mixing them into MRR makes the metric less useful as a predictor of future revenue.
ARR: Annual Recurring Revenue
ARR is simply MRR × 12. It is most useful for companies with predominantly annual contracts, since it expresses revenue at a scale that matches annual business planning.
ARR = MRR × 12
Companies with mostly monthly contracts typically communicate in MRR. Companies with mostly annual contracts (common in mid-market and enterprise SaaS) typically communicate in ARR.
The Four Components of MRR Movement
Tracking MRR as a single number hides what is driving changes. Most SaaS companies break down MRR changes into four components:
- New MRR: Revenue from customers who just signed up this month
- Expansion MRR: Additional revenue from existing customers who upgraded or purchased add-ons
- Churned MRR: Revenue lost from customers who cancelled
- Contraction MRR: Revenue lost from customers who downgraded
Net new MRR = New MRR + Expansion MRR − Churned MRR − Contraction MRR
If expansion MRR exceeds churned MRR, your net revenue churn is negative, meaning your existing customer base is growing revenue even without adding new customers. This is one of the healthiest positions a SaaS business can be in.
Why MRR Matters More Than Revenue
Monthly revenue (the GAAP line on your income statement) can fluctuate based on when annual contracts are booked and recognized. MRR normalizes this to show the underlying run rate of the business. It answers: if nothing changes, what will we earn per month going forward?
This makes MRR the right metric for:
- Forecasting future revenue
- Calculating unit economics (LTV, payback period)
- Identifying growth trends (new vs. expansion vs. churn)
- Comparing growth rates across time periods
Common MRR Mistakes
Including one-time revenue: Setup fees and professional services should not be in MRR.
Not normalizing annual plans: If you count an annual subscriber's full payment in the month they paid, you overstate that month and will see a drop the following month.
Ignoring failed payments: Customers with failed payment methods are technically still "active" but their revenue is at risk. Many teams track "contracted MRR" vs. "collected MRR" separately.
Mixing trial accounts: Trials do not generate revenue. Do not include trial users in MRR until they convert to a paid plan.