What Is MRR and ARR?
MRR, short for Monthly Recurring Revenue, is the predictable revenue a subscription business collects every month from its active customers. ARR, short for Annual Recurring Revenue, is that same predictable revenue scaled up to a yearly figure. Both numbers exist because subscription businesses need a clear, standard way to describe recurring, predictable income — separate from one-time revenue, like a setup fee or a single consulting project — since predictable recurring revenue is what investors, leadership, and the whole business actually plan around.
Quick facts
- MRR formula: add up the monthly subscription revenue from every active customer.
- ARR formula: MRR × 12 (or, add up annual subscription revenue directly, for customers who pay yearly).
- MRR and ARR only count recurring revenue — one-time fees, like a setup charge or a one-off service, are excluded.
- These numbers are tracked continuously, similar to a KPI, and are one of the most closely watched health metrics for any subscription business.
- MRR is broken down further into components like new MRR, expansion MRR, and churned MRR, to understand exactly where growth (or loss) is coming from.
The formulas
MRR = Sum of monthly subscription revenue from all active customers
ARR = MRR × 12
A worked example: A project management software company has:
- 800 customers on a $30/month plan: 800 × $30 = $24,000
- 150 customers on a $100/month plan: 150 × $100 = $15,000
- 20 customers on a $500/month plan: 20 × $500 = $10,000
MRR = $24,000 + $15,000 + $10,000 = $49,000
ARR = $49,000 × 12 = $588,000
This company can describe its recurring revenue as either "$49,000 in MRR" or "$588,000 in ARR" — both describe the same underlying business, just at different time scales, and different audiences tend to prefer one or the other (MRR for day-to-day operational tracking, ARR for a bigger-picture annual view often used with investors).
Why both numbers exist, instead of just one
MRR is more useful for tracking month-to-month momentum — a sudden drop in MRR this month is an immediate, actionable signal. ARR is more useful for communicating the overall size and trajectory of the business at a glance, especially to investors or executives thinking in annual terms, like comparing this year's recurring revenue to last year's. Neither number is "more correct" — they're the same underlying reality, viewed at different time scales for different purposes.
Breaking MRR down into its components
A single MRR number hides important detail about why it changed. Most subscription businesses track several components separately:
| Component | What it captures |
|---|---|
| New MRR | Revenue from brand-new customers this period |
| Expansion MRR | Additional revenue from existing customers upgrading or buying more (see expansion revenue) |
| Contraction MRR | Revenue lost from existing customers downgrading, without fully canceling |
| Churned MRR | Revenue lost from customers who canceled entirely |
Watching these separately reveals a much clearer picture than the single top-line number. A business with flat overall MRR could actually be growing its new customer revenue while losing an equal amount to churn — a very different, more urgent story than a business that's simply not growing at all.
MRR/ARR vs one-time revenue
Not all revenue counts toward MRR or ARR. A one-time implementation fee, a single custom project, or a non-recurring purchase should be excluded, since the whole point of these metrics is to capture predictable, recurring income specifically — mixing in one-time revenue makes the number a less reliable signal of the business's ongoing, repeatable health.
Common mistakes when calculating MRR and ARR
- Including one-time fees in the MRR calculation. This inflates the number and makes it a less accurate predictor of next month's revenue.
- Not adjusting for discounts. If a customer is paying a discounted rate, MRR should reflect what they're actually paying, not the full list price.
- Simply multiplying by 12 without accounting for known churn. ARR calculated as "MRR × 12" is a snapshot based on current recurring revenue — it isn't a guarantee, since customers can and do churn before the year is up.
- Not breaking MRR down into its components. Watching only the single top-line MRR number hides whether growth is coming from new customers, existing customer expansion, or simply masking underlying churn.
FAQ
Is ARR just MRR multiplied by 12, or is it calculated differently? For most subscription businesses, ARR is simply MRR × 12 — a straightforward scaling of the current monthly recurring revenue snapshot to an annual figure, not a separate, independently calculated number.
Do one-time payments count toward MRR or ARR? No — these metrics are specifically meant to capture predictable, recurring revenue. A one-time setup fee or a single non-recurring project should be tracked and reported separately.
What's a healthy MRR growth rate? It varies significantly by company stage and industry, but many early-stage SaaS companies aim for 10-20% month-over-month MRR growth, while more mature companies typically see and expect a lower, more stable growth rate as the revenue base gets larger.
How is MRR different from total revenue? Total revenue includes everything a business earns, including one-time sales, services revenue, and other non-recurring income. MRR isolates just the predictable, recurring subscription portion, which is usually a more useful number for understanding a subscription business's underlying health and trajectory.