If you're building or evaluating a SaaS business, MRR and ARR are the two most important numbers to understand. Yet many founders and marketers confuse them — or use them interchangeably when they tell different stories about the health of your business. This guide explains both metrics clearly with formulas and real examples.
What Is Monthly Recurring Revenue (MRR)?
MRR (Monthly Recurring Revenue) is the predictable revenue your SaaS business earns every month from active subscriptions. It's normalized to a monthly figure — even if customers pay annually, you divide by 12 to get the monthly equivalent.
Key Metric: MRR (Monthly Recurring Revenue)
Formula: MRR = Sum of all active monthly subscription payments
Tip: Normalize annual payments by dividing by 12
Example: You have 3 customers on $99/month plans and 5 customers on $299/month plans. MRR = (3 ร $99) + (5 ร $299) = $297 + $1,495 = $1,792/month
What Is Annual Recurring Revenue (ARR)?
ARR (Annual Recurring Revenue) is simply MRR multiplied by 12. It represents your annual run-rate revenue. ARR is the standard metric for venture capital evaluation and is often used in B2B SaaS for enterprise contracts and reporting.
Key Metric: ARR (Annual Recurring Revenue)
Formula: ARR = MRR ร 12
Usage: Standard for VC evaluation and enterprise reporting
Example: Using the same data above: ARR = $1,792 ร 12 = $21,504/year
What Is the Difference Between MRR and ARR?
| Metric | MRR | ARR |
|---|---|---|
| Definition | Monthly Recurring Revenue | Annual Recurring Revenue |
| Formula | Sum of monthly subscriptions | MRR ร 12 |
| Best for | Tracking month-to-month growth | Annual planning, valuations, fundraising |
| Use case | Daily/weekly monitoring | Board reports, enterprise deals |
| Precision | More granular, catches issues faster | Annualized view, smoother fluctuations |
What Are the Components of MRR?
To truly understand your MRR, break it into these components:
1. New MRR
Revenue from new customers acquired in the month. This is your pure acquisition engine.
2. Expansion MRR
Revenue from existing customers upgrading their plans (upgrades, add-ons, seat expansions). This is the most efficient MRR — it costs far less to generate than new MRR since there's no CAC (Customer Acquisition Cost).
3. Contraction MRR
Revenue lost from customers downgrading plans or reducing seats. Track this closely — high contraction signals churn risk or pricing dissatisfaction.
4. Churned MRR
Revenue lost from customers cancelling entirely. This is the number to minimize — it's inevitable but should be kept below your New MRR to maintain growth.
Net New MRR Formula
Key Metric: Net New MRR
Formula: Net New MRR = New MRR + Expansion MRR โ Contraction MRR โ Churned MRR
Tip: Positive = growing; negative = shrinking revenue base
Example: New MRR: $500 + Expansion MRR: $200 โ Contraction: $50 โ Churned: $100 = $550 Net New MRR
Why Does MRR Growth Rate Matter for SaaS?
The most important number isn't your absolute MRR — it's your MRR growth rate. The "SaaS rule of 40" states that a healthy SaaS company has a combined growth rate and profit margin that equals or exceeds 40%.
- MRR growth rate = ((Current MRR โ Previous MRR) รท Previous MRR) ร 100
- A 10% monthly MRR growth rate means your revenue doubles every ~7 months
- A 15% monthly MRR growth rate means your revenue doubles every ~5 months