MRR vs ARR: Which Revenue Metric Should You Focus On?

If you're building a SaaS business, you've definitely heard of MRR and ARR. But which one should you focus on? When should you use each? And how do you calculate them correctly?

Let's break it down.

What is MRR (Monthly Recurring Revenue)?

MRR is the predictable revenue you expect to receive every month from active subscriptions.

How to Calculate MRR

Basic formula:

MRR = Number of Customers × Average Revenue Per Customer

More accurate formula:

MRR = Sum of all active monthly subscription values

Important: Normalize annual subscriptions to monthly values.

Example:

• 50 customers on $99/month plan = $4,950
• 20 customers on $299/month plan = $5,980
• 10 customers on $999/year plan = $833/month (999 ÷ 12 × 10)
• Total MRR = $11,763

Types of MRR

Understanding MRR components helps you diagnose growth:

1. New MRR: Revenue from new customers 2. Expansion MRR: Revenue from upgrades and add-ons 3. Contraction MRR: Revenue lost from downgrades 4. Churned MRR: Revenue lost from cancellations 5. Reactivation MRR: Revenue from returning customers

Net New MRR formula:

Net New MRR = New MRR + Expansion MRR + Reactivation MRR - Contraction MRR - Churned MRR

What is ARR (Annual Recurring Revenue)?

ARR is your MRR multiplied by 12. It represents your annualized revenue run rate.

How to Calculate ARR

ARR = MRR × 12

Simple, right? But there are nuances.

Should you include:

• Annual prepayments? Yes, normalized
• Monthly contracts? Yes, annualized
• Usage-based revenue? Include predictable portion only
• One-time fees? No—these aren't recurring

When to Use MRR vs ARR

Use MRR When:

1. Managing day-to-day operations - MRR shows immediate trends - Easier to spot monthly changes - Better for cash flow planning

2. Your average contract is monthly - Most customers pay month-to-month - Quick feedback on changes

3. You're early stage - Sub-$1M ARR companies often focus on MRR - Numbers feel more tangible

4. Analyzing short-term experiments - Pricing tests - Feature launches - Marketing campaigns

Use ARR When:

1. Talking to investors - Industry standard for comparisons - $10M ARR sounds better than $833K MRR

2. Your average contract is annual - Enterprise SaaS - Annual prepayment incentives

3. Strategic planning - Annual budgets and forecasts - Milestone setting

4. Hiring and fundraising - Compensation benchmarks - Valuation discussions

Common Mistakes to Avoid

Mistake 1: Including Non-Recurring Revenue

Wrong: Counting setup fees, professional services, or one-time charges in MRR/ARR.

Right: Only include genuinely recurring subscription revenue.

Mistake 2: Not Normalizing Contract Lengths

Wrong: Counting a $12,000 annual contract as $12,000 MRR in the month it's signed.

Right: Spread it evenly: $1,000 MRR each month.

Mistake 3: Counting Committed but Not Active

Wrong: Including signed contracts that haven't started billing.

Right: Only count active, billing subscriptions.

Mistake 4: Ignoring Seasonality with ARR

Wrong: Taking December MRR × 12 and calling it ARR.

Right: Use trailing averages for more accurate annualization.

Mistake 5: Double-Counting Multi-Year Deals

Wrong: Counting a 2-year $24,000 deal as $24,000 ARR.

Right: It's $12,000 ARR (the annual portion).

MRR/ARR Movement Analysis

The most valuable insight comes from analyzing how MRR changes:

Healthy Movement Pattern:

• New MRR > Churned MRR
• Expansion MRR growing
• Contraction MRR stable or declining

Warning Signs:

• Churned MRR exceeding New MRR
• High contraction relative to expansion
• Declining New MRR velocity

Tracking MRR and ARR with KPIStack

KPIStack connects directly to Stripe and automatically calculates:

• Current MRR/ARR
• MRR breakdown (new, expansion, contraction, churn)
• Historical trends
• Month-over-month and year-over-year growth

No spreadsheets. No manual work. Just accurate metrics.

Start tracking your revenue for free

Summary

Aspect

MRR

ARR

Best for	Operations, short-term	Strategy, fundraising
Frequency	Daily/weekly review	Quarterly/annual review
Granularity	High (see monthly changes)	Lower (big picture)
Industry use	SMB SaaS	Enterprise SaaS

Bottom line: Track both. Use MRR for operations, ARR for strategy. And make sure you're calculating them correctly.