What is MRR & ARR?
Definition
Monthly Recurring Revenue (MRR) is the predictable revenue a subscription business earns each month. Annual Recurring Revenue (ARR) is MRR multiplied by 12. These metrics are foundational for SaaS businesses because they show predictable, recurring income, which investors value highly. MRR components include new MRR (new customers), expansion MRR (upgrades and upsells), contraction MRR (downgrades), and churned MRR (cancellations). Net MRR growth = New + Expansion - Contraction - Churned. Understanding these components is essential for diagnosing growth health and forecasting revenue.
Expert Insights
“ARR is the single most important number for a SaaS business. It represents the heartbeat of your company.”
“The beauty of recurring revenue is that it compounds. Every month you keep a customer, that MRR keeps flowing. Churn is the enemy of compounding.”
Key Statistics
SaaS companies trade at median 6-8x ARR for public companies
Source: BVP Cloud Index
Top-quartile SaaS companies grow ARR at 80%+ year-over-year
Source: OpenView Partners
Companies with strong net revenue retention (120%+) command 2x higher valuations
Source: SaaS Capital
Key Points
- MRR = Monthly Recurring Revenue from all active subscriptions
- ARR = MRR × 12 (Annual Recurring Revenue)
- Net New MRR = New + Expansion - Contraction - Churned
- Primary metrics for SaaS valuation and investor communication
- Predictability is the key value driver for investors
- Component breakdown reveals growth quality and health
- CMRR (Committed MRR) includes signed contracts not yet active
How to Measure MRR & ARR
MRR and ARR should be tracked in detail, broken down by component to understand growth quality and diagnose issues.
| Metric | Description | Benchmark |
|---|---|---|
| New MRR | Revenue from new customers acquired in the period. Shows effectiveness of sales and marketing. | Should consistently exceed churned MRR for healthy growth |
| Expansion MRR | Revenue increase from existing customers through upsells, cross-sells, or seat additions. | Best companies see expansion equal 30%+ of new MRR |
| Churned MRR | Revenue lost from customers who cancelled. Track gross churn before expansion and net churn after. | Under 2-3% monthly gross churn for healthy businesses |
| Net MRR Growth Rate | Month-over-month percentage change in total MRR. The headline growth metric. | 10%+ monthly for early stage, 5%+ for growth stage |
| Quick Ratio | (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR). Shows growth efficiency. | 4+ is excellent, 2+ is healthy, under 1 is concerning |
Case Studies
Twilio
Twilio needed to demonstrate the value of their usage-based model to investors who were more familiar with seat-based SaaS metrics.
Twilio developed 'Dollar-based Net Expansion Rate' to show that existing customers consistently increased their usage over time. They proved that their revenue expanded naturally as customers grew.
Twilio consistently reported 130-150% net dollar retention, meaning their existing customer base grew 30-50% annually without new sales. This contributed to their $65 billion market cap.
Zoom
Zoom entered a crowded video conferencing market where incumbents had significant MRR advantages. They needed to grow ARR rapidly to compete.
Zoom focused on product excellence and freemium conversion. Their free tier drove viral adoption, converting to paid as teams exceeded limits. Expansion happened naturally as companies grew.
Zoom grew from $60 million ARR in 2017 to over $4 billion ARR by 2021. Their efficient growth model (high net retention, low CAC) demonstrated how product-led growth scales ARR.
Common Mistakes to Avoid
Including non-recurring revenue in MRR
Why it fails: One-time fees, services revenue, and variable usage above subscription should not be in MRR. This overstates predictable revenue and misleads investors.
Instead: Only include truly recurring subscription revenue. Track one-time revenue separately. Be consistent and conservative in your MRR definition.
Ignoring MRR component breakdown
Why it fails: Total MRR growth can mask problems. You might be growing overall while losing existing customers faster than you acquire new ones. Eventually this catches up.
Instead: Always track new, expansion, contraction, and churned MRR separately. Calculate quick ratio and net retention. Understand the quality of your growth, not just the quantity.
Confusing ARR and ACV
Why it fails: ARR (Annual Recurring Revenue) is total recurring revenue; ACV (Annual Contract Value) is the value of individual contracts. Mixing these creates confusion in reporting.
Instead: ARR = all recurring revenue annualized. ACV = value of specific contracts. Average ACV shows deal size. ARR shows total business size. Use both correctly.
What to Do Next
To effectively manage and grow MRR/ARR, implement proper tracking and focus on all components of recurring revenue.
- Set up proper MRR tracking with component breakdown
- Calculate and monitor quick ratio monthly
- Develop expansion revenue strategies (upsells, cross-sells)
- Implement churn reduction programs to protect existing MRR
- Create cohort analysis to understand revenue behavior over time
- Align team incentives around net MRR growth, not just new sales
Frequently Asked Questions
Related Terms
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