MRR vs. ARR: What’s The Difference and Why Does It Matter?

Since most startups operate at a loss in their early years, it might feel like there’s no way to get a handle on areas where you are seeing revenue growth. Fortunately, even while you’re operating on a shoestring, you can tap into two metrics to visualize where your business is seeing more revenue — or losing it. The main tools here are monthly recurring revenue (MRR) and annual recurring revenue (ARR). Understanding both along with the key differences between them can help you keep a finger on the pulse of your startup.

This is particularly true if you’re a SaaS company or you offer any subscription or contract-based services or products. With MRR and ARR, you can directly monitor where your user base is scaling up and where you’re seeing churn.?

Defining monthly recurring revenue and annual recurring revenue

Both MRR and ARR get their power from their simplicity. This is a metric your startup should be easily able to track, helping you keep updated figures in front of the right people on your team.?

Let’s start with the basics:?

Monthly recurring revenue (MRR) is revenue for recurring services categorized in that month. It doesn’t include one-time or non-recurring revenue like set-up fees and one-off professional services.?

For example Samplify a SAAS based company has 10 customers that pay them $50 each per month. The total MRR would be calculated as 10 x $50 or $500 of MRR.?

Annual recurring revenue (ARR) is the measure of revenue components that recur on an annual basis, like annual contracts. At its simplest, ARR = MRR * 12.

The ARR given the above example would be equal to $500 x 12 or $6,000.?

It seems pretty basic, and it is. But people often get trapped in the simplicity, including things in their MRR/ARR that shouldn’t be there or missing important components.?

Your MRR and ARR should include:

• Subscription fees or contracts that renew. This can be revenue that recurs automatically unless the customer cancels or revenue that should recur unless something goes awry.?
• Add-ons. Include fees you charge for service/product expansions, like fees for additional features or extra seats/users.
• Upgrades. If a customer was on a package for $250 a month and moves up to a package for $300, make sure that change triggers an alert so you can update your MRR and ARR accordingly.?

You also need to factor in:

• Churn. If someone cancels their contract or subscription, that information needs to feed directly into your MRR/ARR calculations.
• Downgrades. If a customer moves to a lower package level or removes seats or features, resulting in less recurring revenue, you need to adjust your MRR/ARR accordingly.?
• Discounts. Many companies can’t assume that X customers at Y package level means X*Y for MRR/ARR. If your startup offers discounts or introductory pricing, you need to add that level of nuance to your calculations.?

To reiterate, in all of your calculations, you’re looking exclusively at recurring revenue. If your company makes money in a one-off instance — like one-time fees, set-up fees, and non-recurring add-ons —?it shouldn’t come into play here.?

The key difference between ARR and MRR?

We just said that ARR = MRR * 12, and that’s true in its most basic form. But most startups have to be flexible and creative, and that means your ARR and MRR might not have a clean 1:12 relationship.

To ensure you’re accurately tracking both, you need to consider and track:?

• Gross MRR churn. It’s worth mentioning again: monitor the monthly recurring revenue lost in a given month based on MRR at the beginning of the month. Factor that into your ARR calculations. It’s also a good idea to keep an eye on any trends you observe in your MRR churn rate. If it trends upward, it’s a sign that you need to take a closer look at your product and/or service to identify the issue(s) driving customers away.?
• Amortization. If you land an annual contract, it shouldn’t come as a lump sum in that month’s MRR calculations. Instead, you should divide it by 12 and spread it out over the coming year to get a more accurate idea of your ARR. Similarly, if you get a multi-year contract, divide it by the applicable number of months to distribute it across your MRR and by the applicable number of years for your ARR calculations.?

Why should you put in all of the work to ensure your MRR and ARR are accurate? They’re both useful tools, and you can use each in different ways.

How startups can leverage MRR and ARR

While your startup has its books to show last month’s and last year’s revenue, that only gets you so far. As you want to plan and scale, MRR and ARR give you forward-looking metrics to inform your decision-making.?

Your MRR helps at a more granular level. It’s useful for short-term planning and identifying seasonal ebbs and flows in your business. It can also show you when new product launches or marketing strategy deployment deliver gains or when a business change translates into increased churn rates.?

ARR gives you a bigger-picture view of where your startup is headed. It can help you predict growth over a longer period of time. Plus, your investors will probably want to see your ARR.?

Beyond that, ARR can help you evaluate staff performance. Not only can it help you see where your sales team is succeeding, but it can also inform you about your customer success team’s performance because it highlights successful upselling and cross-selling.

Once you track MRR and ARR for a while, you should get a feel for the trends in your startup’s customer acquisition and churn. From there, you can predict future MRR/ARR, helping you make strategic decisions about when and where to scale.?

MRR and ARR calculations can be a huge asset to startups, illuminating areas of success and places that need problem-solving. But while they seem simple to calculate on the surface, there’s a lot to consider. Fortunately, you don’t have to go it alone.

Our team at ShayCPA works exclusively with tech startups so we live and breathe financial metrics like ARR and MRR. Not only can we help you make these calculations, but we can also use them to provide targeted, tailored advice. If you want to learn more, get in touch.?