What are MRR and ARR (recurring revenue)
Also known as: monthly recurring revenue, annual recurring revenue
MRR, short for monthly recurring revenue, is the sum of what customers pay each month for subscriptions and ongoing contracts. ARR, annual recurring revenue, is the same measure on a yearly basis. Businesses with monthly contracts usually track MRR; those with annual contracts, ARR. One off revenue, such as setup fees and one time consulting, is left out of both.
ARR = MRR × 12
This holds for a stable base of monthly contracts. With annual contracts, ARR is usually summed from each contract's annual value, and the equivalent MRR is that value divided by 12.
A software company has 200 customers paying $300 a month: MRR of $60,000. The next month, 15 new customers join (+$4,500), existing customers upgrade and pay $1,200 more, and 8 cancel (−$2,400).
Net new MRR for the month is $3,300, and total MRR reaches $63,300. Looking at the three parts separately shows where to act: here, expansion offset half the loss, and reducing cancellations would do more than winning new customers.
The parts of MRR
David Skok recommends tracking these parts separately, in a month by month chart, because each has a different cause and a different fix.
| What it is | |
|---|---|
| New MRR | Recurring revenue from customers who joined in the period |
| Expansion MRR | Increase from existing customers who bought more or upgraded |
| Churned MRR | Revenue from customers who cancelled or downgraded |
| Net new MRR | New plus expansion minus churned |
MRR is not billing
- One off fees, such as setup, training and projects, are excluded.
- An annual contract paid upfront enters MRR divided by 12, not in full in the month it was paid.
- Discounts count: MRR is what customers actually pay.
- Customers on a free trial generate no MRR until they start paying.
Metrics that come from MRR
- Average revenue per account: MRR divided by the number of customers.
- Revenue churn: churned MRR divided by MRR at the start of the period.
- LTV: how much a customer is worth over the relationship.
- CAC payback: how many months a customer's margin takes to pay back the cost of winning them.
How to read MRR growth
The monthly growth rate compares end of month MRR with the start: (ending MRR − starting MRR) ÷ starting MRR. In the example above, from $60,000 to $63,300, growth was 5.5% for the month.
Monthly growth compounds. Sustained at 5.5% a month for a year, MRR nearly doubles, because 1.055 to the 12th power is about 1.9. That is why small improvements in retention and expansion, which affect the whole base every month, are usually worth more than a single month's spreadsheet suggests.
Common mistakes
- Adding one off revenue to MRR to make the number look bigger.
- Looking only at total MRR without separating new, expansion and churned.
- Counting an annual contract's full value in the month it was paid.
- Multiplying a falling MRR by 12 and calling it ARR.
Frequently asked questions
What is MRR?
Monthly recurring revenue: the sum of what customers pay each month for subscriptions and ongoing contracts, excluding one off revenue.
What is ARR?
Annual recurring revenue. For stable monthly contracts, it is MRR times 12; for annual contracts, it is the sum of annual values.
When should I use MRR versus ARR?
MRR is more common for businesses with monthly contracts; ARR for businesses with annual or multi year contracts.
Do setup fees count toward MRR?
No. One off revenue, such as setup, training and projects, is left out of MRR and ARR.
What is expansion MRR?
The increase in recurring revenue from existing customers who bought more, added users or upgraded their plan.
Related terms
- ChurnChurn is the rate of customers who stop buying or cancel during a period, relative to those the business had...
- LTVLTV (lifetime value, also called CLV) is the value a customer generates for a business over the entire time...
- CAC paybackCAC payback is the time it takes for the margin a customer generates to repay what the company spent to win...
- CACCAC (customer acquisition cost) is how much a business spends, on average, to win each new customer. You add...
- KPIA KPI (key performance indicator) is a number chosen to show whether a business is reaching a specific goal...
Rodrigo Fávaro
Founder of ROO3, a marketing and technology agency in São José do Rio Preto, Brazil. Builds AI products running in production (Tobia, gerar.app, Pense Mercado) and maintains the AI Benchmark, a public ranking of AI models.
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