ARR vs MRR
| Aspect | ARR (Annual Recurring Revenue) | MRR (Monthly Recurring Revenue) |
|---|---|---|
| Time Frame | Annualized (12 months) | Monthly |
| Calculation | MRR × 12 | Sum of all monthly subscriptions |
| Best For | Annual contracts, investor reporting | Monthly contracts, operational tracking |
| Includes | Recurring revenue only | Recurring revenue only |
| Excludes | One-time fees, usage overages | One-time fees, usage overages |
💡TL;DR
MRR = sum of all monthly subscription revenue. ARR = MRR × 12. Use MRR for: monthly operations, short-term forecasting, churn analysis. Use ARR for: investor reporting, company valuation, annual planning. Common mistake: including one-time fees or usage overages—these inflate metrics. Track both: MRR for speed, ARR for scale. Most VCs want to see ARR milestones ($1M, $10M, $100M).
Definition
MRR (Monthly Recurring Revenue) is the sum of all recurring subscription revenue normalized to a monthly amount. ARR (Annual Recurring Revenue) is MRR multiplied by 12, representing the annualized value. ARR is used for investor reporting and valuation; MRR is used for monthly operations and forecasting.
🏢What This Means for SMB Teams
Early-stage SMBs often mix monthly and annual contracts. Normalize everything to MRR first, then calculate ARR. Be careful with annual prepayments—recognize as MRR over 12 months, not as a lump sum.
Track MRR, churn, CAC payback—AI acts when metrics slip.
Metrics that matter, actions that move them.
📋Practical Example
A 25-person SaaS ($2.5M ARR) reported "$3.2M ARR" to investors by including implementation fees and overage charges. Due diligence revealed true recurring ARR was $2.5M. The founder lost credibility, and the term sheet was revised down 20%. They rebuilt trust by separating: (1) Pure MRR/ARR (subscriptions only), (2) Services revenue (implementation), (3) Usage revenue (overages). Clean metrics restored investor confidence.
🔧Implementation Steps
- 1
List all revenue streams: subscriptions, one-time fees, usage, services.
- 2
Isolate recurring subscriptions only for MRR calculation.
- 3
Normalize annual contracts: divide by 12 for monthly contribution.
- 4
Calculate MRR = sum of all normalized monthly subscription values.
- 5
ARR = MRR × 12. Report both, clearly labeled, without mixing revenue types.
❓Frequently Asked Questions
Should I use ARR or MRR for my board deck?
Use ARR for the headline metric (it's the standard for SaaS valuation). Show MRR trends in supporting charts for monthly growth analysis. Always include both if you have a mix of monthly and annual contracts.
How do I handle annual contract prepayments?
For MRR/ARR: recognize 1/12 per month (economic value). For cash flow: recognize full amount when received. For GAAP revenue: recognize 1/12 per month (deferred revenue). Keep these three views separate.
⚡How Optifai Uses This
Optifai automatically calculates MRR and ARR from connected billing systems, separating recurring from one-time revenue. Dashboards show both metrics with drill-down by segment, cohort, and product line.
📚References
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Related Terms
ARR (Annual Recurring Revenue)
The annualized value of recurring subscription revenue. ARR = MRR × 12. It represents the yearly run-rate assuming no growth or churn, used for valuation, planning, and investor communication.
MRR (Monthly Recurring Revenue)
The predictable revenue a SaaS company expects to receive every month from active subscriptions. MRR = Sum of (customers × monthly subscription price). It normalizes annual and monthly contracts into a single metric for tracking growth velocity.
NRR (Net Revenue Retention)
The percentage of recurring revenue retained from existing customers after accounting for expansion, contraction, and churn. NRR = (Starting MRR + Expansion - Contraction - Churn) ÷ Starting MRR × 100. NRR >100% means you grow even without new customers.
GRR (Gross Revenue Retention)
The percentage of recurring revenue retained from existing customers, excluding expansion revenue. GRR = (Starting MRR - Churned MRR - Contraction MRR) / Starting MRR. Unlike NRR, GRR cannot exceed 100% because it only measures retention, not growth.
Expansion Revenue
Additional recurring revenue from existing customers through upsells (higher tier), cross-sells (additional products), or seat expansion. Expansion Revenue = Ending MRR from Existing Customers - Starting MRR from Same Customers (excluding churn).