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Mastering MRR and ARR: The Revenue Metrics That Drive Growth

For subscription and recurring revenue businesses, Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are the core metrics that determine growth and allow for accurate forecasting of future cash flow. Let's break down what these metrics are and why they are so crucial:

Monthly Recurring Revenue (MRR)

MRR represents the predictable, recurring revenue from all active subscriptions normalized for a single month. It only includes revenue from customers with recurring billing, excluding one-time fees and charges.

To calculate MRR:

  1. Take the monthly recurring charge for each active subscription customer

  2. Sum all of those monthly charges together

For example, if you have 500 customers paying $20/month, 300 customers paying $50/month, and 200 customers paying $100/month, your total MRR would be:

(500 x $20) + (300 x $50) + (200 x $100) = $55,000

MRR shows you the revenue you can reliably count on each month from your existing customer base. Tracking MRR growth month-over-month and year-over-year allows you to measure progress accurately.

Annual Recurring Revenue (ARR)

While MRR is useful for monthly tracking, ARR provides a normalized annual view by simply taking MRR and multiplying it by 12.

Using the example above, if your MRR is $55,000, then your ARR would be:

$55,000 x 12 = $660,000

ARR gives you a closer approximation of your actual recognized revenue for the year. It accounts for any monthly fluctuations and provides a cleaner, annualized number for modeling and projections.

You can calculate ARR for your overall business, but it's also useful to segment ARR by customer type, pricing plan, geography, etc. This allows you to analyze which segments are growing fastest.

Ideally, you want to see steady MRR growth between 5-10% month-over-month for an established business, translating to 60-120% ARR growth year-over-year. Anything higher could signal potential churn issues or unsustainable discounting.

While MRR and ARR don't tell the whole story, they are the fundamental growth metrics that every recurring revenue business must track relentlessly. In the next post, we'll cover the other critical metric - churn rate.

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