As a SaaS business owner, it’s important to understand the key metrics used to measure the financial performance and growth of your subscription-based company. Two of the most commonly referenced metrics are Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR).
Monthly Recurring Revenue, also called Monthly Recurrent Revenue, represents the recurring revenue that a company generates each month from customers on ongoing subscription contracts or agreements. To calculate MRR, you take the monthly subscription fee for all active customer contracts and add them together.
Annual Recurring Revenue represents the total recurring revenue expected for the next 12 months based on contracts in place with existing customers. To calculate ARR, you take the MRR figure and multiply it by 12 to annualize it.
The difference is that MRR only reflects one month whereas ARR incorporates the full annual impact by multiplying the MRR by 12. ARR provides more context about the total revenue potential but lags one month behind MRR as contracts have to be in place for a full month before impacting the ARR calculation.
MRR vs ARR: Key Differences
Here is a table summarising the key differences between MRR and ARR:
MRR | ARR |
Stands for Monthly Recurring Revenue | Stands for Annual Recurring Revenue |
Represents recurring revenue generated in a single month from subscriptions | Represents projected recurring revenue for the next 12 months based on existing contracts |
Calculated by adding monthly subscription fees from all active customer contracts | Calculated by taking MRR and multiplying it by 12 to annualize it |
Provides month-to-month visibility into recurring revenue | Provides an annual view of projected recurring revenue over a 12 month period |
Directly impacts near-term cash flow forecasting and financial planning | Useful for fundraising, annual targets, valuation, and longer-term projections |
Fluctuates monthly based on new sales, churn, expansions etc. | Smooths out monthly fluctuations by annualizing the revenue |
Leads ARR by one month as it takes one month for new contracts to impact ARR calculation | Lagging indicator that incorporates full annual run-rate impact of contracts already in place |
Better metric for tracking short-term growth trends | More relevant metric for Wall Street analysts and long-term forecasts |
Timeframe: MRR reflects monthly revenue while ARR shows annual revenue projections
Calculation: MRR is the monthly subscription revenue total. ARR takes the MRR and multiplies by 12.
This provides an overview of MRR and ARR and highlights some of the key differences between the metrics.
Understanding MRR and ARR Forecasting
Being able to accurately forecast MRR and ARR is an important part of financial planning for SaaS businesses.
There are a few key factors that influence these metrics:
- New Customer Acquisition: Bringing on new paying customers each month is critical to increasing MRR. Larger deals also lift ARR faster.
- Expansion Revenue: Getting existing customers to purchase additional services, seats/users, or upgrading their plan boosts both MRR and ARR.
- Churn Rate: The rate at which customers cancel has the opposite effect, dragging down MRR and ARR if it rises.
- Seasonality: Some businesses experience natural fluctuations in purchasing throughout the year that affect monthly and annual forecasts.
- Promotions and Discounts: Offerings that change pricing need to be accounted for in projections of future revenue.
- Macroeconomic Factors: External conditions like recessions can impact demand across certain verticals.
With an understanding of these variables, SaaS leaders can build more accurate MRR and ARR models to help set targets and allocate resources accordingly to drive growth. Key assumptions around new sales, existing customer spending, and churn should be backtested against history and adapted over time based on results.
Regularly revising projections is important as the business evolves. Done right, financial forecasting equips companies to scale strategically using metrics like MRR and ARR that Wall Street closely watches. Both quantify the value of the recurring customer base in a quantitative way for investors.
MRR vs. ARR Reporting Best Practices
Leading SaaS organizations report on MRR and ARR consistently in their financial communications and discussions with the investment community. Here are some best practices:
- Highlight MRR growth rates quarterly to show recent traction and momentum.
- Disclose Year-over-Year ARR percentage increase annually in earnings to demonstrate sustained demand.
- Provide MRR and ARR metrics for sections of the business to parse global metrics.
- Forecast MRR and ARR for the next quarter and year to maintain transparency.
- Discuss how new products, features and marketing will drive future MRR/ARR expansion.
- Note any lumpiness or seasonality expected that smooths over time.
- Use MRR and ARR selectively to measure initiatives, not just top-line growth.
- Benchmark against public peers or industry segments for relative performance.
Transparent reporting of MRR and ARR establishes credibility with analysts and investors. It allows for ongoing performance tracking against past guidance. Consistency in methodology and commentary also makes the business easier to value accurately over the long-run.
In Closing
While SaaS companies still leverage other important metrics like CAC, LTV, NPV, and gross retention, MRR and ARR are critical for measuring the financial heart of a recurring revenue model – the revenue generated from customers on a monthly and annual basis.
Understanding both metrics, how they relate, and their appropriate uses for budgeting, forecasting, and reporting out to stakeholders is an invaluable skill for subscription business leaders.
With a strong grasp of MRR vs. ARR, SaaS executives have powerful indicators to gauge the financial health and trajectory of their companies.
More To Read: