In the world of Software as a Service (SaaS), predictable revenue is the holy grail. It's the engine that fuels growth, attracts investors, and provides a stable foundation for your business. At the heart of this predictability lie two critical metrics: Monthly Recurring Revenue (MRR) and its annual counterpart, Annual Recurring Revenue (ARR). Understanding and meticulously tracking these figures is not just good practice; it's essential for survival and success.
MRR represents the predictable revenue a SaaS company expects to receive from its customers in a given month. It excludes one-time fees, setup costs, professional services, and any other non-recurring revenue. Think of it as the stable income stream generated by your subscriptions, month after month.
To calculate MRR, you essentially sum up the monthly value of all your active subscriptions. For simplicity, if a customer pays annually, you'd divide their annual payment by 12 to get their MRR contribution.
MRR = SUM(Monthly Subscription Price of all active customers)ARR is simply your MRR multiplied by 12. It's a more strategic metric, often used for longer-term planning, forecasting, and when dealing with larger enterprise clients who typically sign annual contracts. Investors frequently look at ARR to gauge the scale and potential of a SaaS business.
ARR = MRR * 12It's crucial to differentiate between gross MRR/ARR and net MRR/ARR. Gross MRR/ARR is the total recurring revenue from all customers. However, to understand the true health of your recurring revenue, you need to consider net MRR/ARR, which accounts for churn (lost customers) and expansion (upgrades by existing customers).
graph TD; MRR_Start[Starting MRR] --> Add_New[New MRR] --> Expansion[Expansion MRR] --> Churn[Churned MRR] --> Upgrade_Downgrade[Upgrade/Downgrade MRR] --> MRR_End[Ending MRR];
The formula for Net MRR is as follows: