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MRR vs ARR: What Is the Difference?
Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are the two most quoted numbers in subscription software. They show how much predictable revenue a business expects from active customers. They are related, but they suit different situations.
What is MRR?
MRR is the total amount of recurring revenue a business expects to earn in a month from active subscriptions. If 100 customers each pay 50 a month, MRR is 5,000. If a customer pays 600 for a year up front, you convert it to a monthly figure, which is 50 a month.
What is ARR?
ARR is the annualised value of recurring revenue. The simplest calculation is ARR = MRR × 12. With an MRR of 5,000, ARR is 60,000. ARR is more common for companies that sell annual or multi-year contracts to businesses.
What to include and exclude
- Include: subscription fees, recurring add-ons and recurring usage charges that are predictable.
- Exclude: one-time fees such as setup or training, non-recurring professional services, and hardware sales.
- Be careful with: discounts, free trials and variable usage. Count what customers actually pay, and be consistent about the rules you apply.
The four movements in MRR
Looking at how MRR changes over a month tells you much more than the total alone:
- New MRR: revenue from newly acquired customers.
- Expansion MRR: extra revenue from existing customers who upgrade or add seats.
- Contraction MRR: revenue lost when customers downgrade.
- Churned MRR: revenue lost when customers cancel.
Net new MRR is new plus expansion, minus contraction and churn. A business can show a growing total while quietly losing customers, so these components are worth tracking separately.
MRR or ARR: which should you use?
- Use MRR if you sell mostly monthly plans or are early in your journey. It shows change quickly.
- Use ARR if you sell annual contracts, report to investors or compare yourself with larger companies.
- Do not call something ARR if it includes one-off revenue. Investors will notice.
Common mistakes
- Multiplying a single strong month by 12 when sales are seasonal or lumpy.
- Counting annual prepayments as one month of MRR instead of spreading them.
- Including customers who have given notice but have not yet left, without saying so.
- Changing the definition from month to month, which makes trends meaningless.
Where to go next
MRR is only one part of the picture. To understand the health of a subscription business, look at it alongside churn rate, customer acquisition cost, customer lifetime value and net revenue retention. Together these SaaS metrics show whether growth is efficient and sustainable.