ARR vs MRR: Understanding SaaS Revenue Metrics
MRR and ARR are the foundational metrics for any subscription business. Here's how to calculate them correctly and when to use each.
Quick Definitions
MRR (Monthly Recurring Revenue): The predictable revenue you receive each month from subscriptions.
ARR (Annual Recurring Revenue): MRR × 12. The annualized value of your recurring revenue.
If you're building a subscription business, MRR and ARR are the metrics that matter most. They tell you how much predictable revenue you're generating and are the basis for valuation, runway calculations, and growth tracking.
Yet in our work as fractional CFOs, we regularly see founders calculate these metrics incorrectly—including one-time fees, forgetting to normalize for billing periods, or mixing in non-recurring revenue.
What Is MRR (Monthly Recurring Revenue)?
MRR is the amount of recurring revenue you can count on receiving each month. It only includes revenue that repeats—subscription fees, recurring licenses, and other predictable recurring charges.
MRR = Sum of All Monthly Subscription Revenue
The key word is "recurring." MRR should not include:
- One-time setup fees
- Professional services revenue
- Hardware sales
- One-time add-on purchases
- Variable usage fees (unless they're truly predictable)
Normalizing for Billing Periods
If you have annual contracts, you need to normalize them to monthly. A customer paying $12,000/year contributes $1,000/month to your MRR, not $12,000.
MRR Normalization Examples
What Is ARR (Annual Recurring Revenue)?
ARR is simply your MRR multiplied by 12. It represents the annualized value of your recurring revenue run rate.
ARR = MRR × 12
ARR is the standard metric for enterprise SaaS companies and is typically what investors reference when discussing valuation. When someone says a company is valued at "10x ARR," they mean 10 times the annual recurring revenue.
ARR Milestones
Certain ARR milestones have become industry benchmarks:
Initial traction. Proves you can sell to real customers. Often a pre-seed/seed milestone.
Product-market fit signal. Typical target for Series A readiness. Often called the "first million."
Scale milestone. Proves repeatable sales motion. Often Series B or beyond.
Centaur status. Major scale achievement. Potential IPO territory.
Calculating MRR Correctly
There are two approaches to calculating MRR:
Customer-Based
Sum up each customer's monthly subscription value.
MRR = Σ (Customer Monthly Fee)
Best for: Smaller customer bases, complex pricing
ARPU-Based
Multiply average revenue per user by customer count.
MRR = ARPU × Customer Count
Best for: Large customer bases, simple pricing
Example Calculation
SaaS Company MRR Calculation
MRR Components: Understanding the Movement
Your total MRR tells you where you are. But to understand where you're going, you need to break down how MRR changes month over month:
New MRR
Revenue from brand new customers acquired this month. The primary driver of growth for most startups.
Expansion MRR
Additional revenue from existing customers (upgrades, add-ons, more seats). This is the "land and expand" motion that drives NRR above 100%.
Reactivation MRR
Revenue from previously churned customers who return. Often overlooked but can be significant.
Contraction MRR
Revenue lost from existing customers who downgrade to lower plans. Track separately from churn.
Churned MRR
Revenue lost from customers who cancel completely. The "leaky bucket" you need to minimize.
The MRR Movement Formula
Ending MRR = Starting MRR + New MRR + Expansion MRR + Reactivation MRR - Contraction MRR - Churned MRR
Track all six components monthly to understand exactly what's driving your growth.
When to Use ARR vs MRR
Both metrics describe the same underlying business, but they're used in different contexts:
| Context | Use This | Why |
|---|---|---|
| Internal tracking | MRR | More granular, shows monthly changes |
| Investor conversations | ARR | Industry standard for valuation |
| Board meetings | Both | ARR for overview, MRR for trends |
| SMB SaaS (<$1K ACV) | MRR | Monthly contracts more common |
| Enterprise SaaS (>$50K ACV) | ARR | Annual contracts are standard |
Common MRR/ARR Mistakes
Including Non-Recurring Revenue
Setup fees, one-time services, and hardware sales should not be in MRR/ARR. These inflate your numbers and mislead investors.
Not Normalizing Annual Contracts
A $120K annual contract is $10K MRR, not $120K. Failing to normalize creates false spikes when contracts are signed.
Counting Committed but Not Active Revenue
A signed contract isn't MRR until the customer is actually using and paying. Don't count revenue from customers who haven't started yet.
Ignoring Discounts
If you give a customer 20% off, their MRR is the discounted amount, not list price. Track effective MRR, not theoretical.
Key Takeaways
- 1MRR = monthly recurring subscription revenue; ARR = MRR × 12
- 2Only include truly recurring revenue—no one-time fees or services
- 3Normalize annual contracts to monthly ($12K/year = $1K MRR)
- 4Track MRR components (new, expansion, churn) to understand growth drivers
- 5Use ARR for investor conversations and valuation; MRR for internal tracking
Need Help Tracking Your SaaS Metrics?
Eagle Rock CFO helps seed and Series A startups set up proper metrics tracking, build investor-ready dashboards, and tell their growth story with data.
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