MRR vs. ARR: Key SaaS company metrics explained

ARR is the heartbeat of your SaaS business— a steady rhythm that signals health and growth. In 2025's competitive landscape, understanding and amplifying this metric is no longer optional; it's essential.

This guide offers a roadmap to not just calculate and interpret ARR, but to actively sculpt it for lasting success.

Read on to learn:

• How to pinpoint your true ARR, avoiding common calculation traps
• What growth rates actually signify, and how to reach ambitious targets
• Proven tactics for fueling ARR through customer engagement and expansion
• The crucial role ARR plays in attracting investors and driving valuations
• Practical strategies to overcome the hurdles of effective ARR management

Let’s get started by explaining what recurring revenue looks like in the SaaS industry.

Understanding recurring revenue for SaaS businesses

Recurring revenue represents the predictable income a business receives at regular intervals over time from ongoing subscriptions, contracts, or repeat sales of products or services.

In the context of the SaaS world, recurring revenue is the lifeblood of subscription-based models. It stems from customers who pay consistent fees for ongoing access to software or services, typically on a monthly or annual basis.

The predictable and stable nature of recurring revenue enables businesses to forecast future income with greater accuracy. This predictability is vital for financial planning, budgeting, and resource allocation. For SaaS companies, it provides a steady cash flow, reducing reliance on one-time sales and allowing for more informed strategic decisions.

A consistent revenue stream supports sustainable growth. By knowing the expected income, businesses can confidently invest in scaling operations, enhancing product development, and expanding customer acquisition efforts.

Furthermore, it allows for a deeper understanding of customer lifetime value (LTV), which aids in refining customer retention strategies. The ability to predict income allows for more accurate growth projections, which is very important for attracting investors.

Note: Learn more about SaaS benchmarks in our dedicated post.

What is monthly recurring revenue (MRR)?

Monthly Recurring Revenue (MRR) is the total predictable revenue your SaaS business generates each month from subscription-based customers. It serves as a key indicator of short-term financial health and operational efficiency.

What role does MRR play in cash flow management?

MRR provides a clear view of incoming monthly revenue, enabling businesses to forecast short-term cash flow. It aids in planning for immediate expenses and investments. Consistent MRR is crucial for maintaining stable cash flow and making informed financial decisions.

Types of MRR

Several types of MRR contribute to a company's overall monthly recurring revenue. Here are three key ones:

• New MRR: Revenue generated from newly acquired customers during the month.
• Expansion MRR: Revenue increases from existing customers due to upgrades, add-ons, or cross-selling.
• Churned MRR: Revenue lost from customers who cancel their subscriptions or downgrade their plans.

How to calculate MRR

Learning how to calculate monthly recurring revenue is essential for understanding the consistent income your SaaS business generates. It involves a systematic approach to accurately reflect your subscription-based revenue. Let’s explain MRR calculation in 3 steps.

Step 1: Identify active subscribers

Begin by determining the total number of customers who have active, paying subscriptions during the specific month you're analyzing. This includes all customers who are currently within their billing cycle and have not canceled or allowed their subscriptions to lapse. Accuracy is paramount here, as any discrepancies will skew your MRR figures.

Step 2: Determine average revenue per user (ARPU)

ARPU is the average amount of revenue generated from each active subscriber during the month. To calculate ARPU, sum up the total recurring revenue from all active subscribers and then divide that sum by the total number of active subscribers.

It is important to understand that not all customers will pay the same amount. Different subscription tiers, discounts, or add-ons will cause fluctuation.

Note: Speaking of customers not always paying the same amount, learn more about enterprise pricing in the SaaS world.

Step 3: Apply the MRR formula

Once you have determined the number of active subscribers and the ARPU, you can apply the basic MRR formula:

MRR = ARPU x Number of Subscribers

This simple calculation provides a snapshot of your predictable monthly revenue.

However, to get a more granular view of your MRR, especially when considering the dynamics of new customers, expansions, and churn, you can also use a more detailed formula:

MRR = (New MRR + Expansion MRR) - Churned MRR

Where:

New MRR represents the revenue generated from newly acquired customers during the month. Expansion MRR accounts for revenue increases from existing customers due to upgrades, add-ons, or cross-selling. Churned MRR reflects revenue lost from customers who cancel their subscriptions or downgrade their plans.

Example calculation

Let's say your SaaS company has 100 active subscribers. Now, 60 of those subscribers pay $50 per month, and 40 pay $75 per month. To find the ARPU, we need to calculate the total monthly revenue:

(60 subscribers * $50/subscriber) + (40 subscribers * $75/subscriber) = $3,000 + $3,000 = $6,000.

Now we divide by the total number of subscribers:

$6000/100 = $60.

So, our ARPU is $60.

Now we can calculate the MRR: $60 * 100 = $6,000. Therefore, the monthly recurring revenue is $6,000.

Or, if we were using the more detailed formula, and we knew that we had $1000 of new MRR, $500 of expansion MRR, and $200 of churned MRR:

$1,000 + $500 - $200 = $1,300.

In this case, our MRR would be $1,300.

What is annual recurring revenue (ARR)?

ARR is the total value of recurring revenue earned by your SaaS business over a year. It provides a long-term view of your company's financial health, reflecting the expected revenue based on current subscriptions.

How to calculate ARR

Calculating ARR involves a straightforward process, though considerations for varying contract lengths are essential. Here’s how to do it for an ARR calculation:

1. Calculate MRR: First, determine your Monthly Recurring Revenue (MRR) using the methods previously discussed.
   
   
2. Annualize the MRR: Multiply your MRR by 12 to project the annual revenue based on the current monthly performance.
   
   
3. Apply the formula: Use the basic ARR formula:
   
   ARR = MRR x 12

Here is a more detailed ARR calculation that takes into account other factors:

ARR = (Yearly subscription revenue + Expansion revenue) - Churn loss

Example calculation

Let's say your SaaS business has an MRR of $10,000. Using the basic formula:

ARR = $10,000 x 12 = $120,000.

Therefore, your ARR is $120,000.

Now, consider a more complex scenario:

• You have $100,000 in annual contracts.
• You gained $20,000 in expansion revenue from upgrades.
• You lost $5,000 due to churn.

Applying the detailed formula:

ARR = ($100,000 + $20,000) - $5,000 = $115,000.

In this instance, your ARR is $115,000.

It is important to remember that if you have multi-year agreements, you will need to annualize those agreements to include them in your ARR. For example, if you have a 3 year agreement for $60,000, you would include $20,000 in your ARR.

What is considered a good ARR growth rate?

A good ARR growth rate depends on the company's stage and market, but consistent year-over-year growth is key. Achieving or exceeding industry benchmarks and maintaining a healthy growth trajectory are indicators of strong performance.

MRR vs. ARR: Key differences in the SaaS industry

When analyzing SaaS revenue, understanding the distinctions between MRR and ARR is crucial. While both metrics track recurring income, they serve different purposes and offer unique insights. Let’s zoom in closer.

Timeframe

MRR provides a short-term, month-to-month view of revenue. MRR vs. ARR highlights that MRR is dynamic, reflecting immediate changes in subscriptions, upgrades, and churn. ARR, conversely, offers a long-term, annual perspective. It smooths out monthly fluctuations, providing a stable view of yearly revenue.

Use cases

MRR is ideal for operational decisions and short-term forecasting. It helps businesses track monthly trends, assess the impact of recent changes, and monitor immediate financial health.

MRR vs. ARR shows that MRR is valuable for day-to-day management. ARR is better suited for strategic planning, long-term financial forecasting, and investor relations. It provides a basis for annual budgeting, resource allocation, and valuation discussions.

Business implications

MRR allows for quick adjustments to pricing, marketing, and sales strategies. It enables businesses to respond rapidly to changing market conditions.

MRR vs. ARR demonstrates that MRR is sensitive to monthly performance. ARR, on the other hand, provides a stable metric for assessing overall business growth and scalability. It is often used to communicate long-term financial health to stakeholders.

Summary table: MRR vs. ARR

Here’s a quick summary table comparing MRR vs. ARR:

Considerations to make when calculating MRR and ARR

Accurate calculation of MRR and ARR is vital for informed decision-making. However, several factors can complicate these calculations. Paying close attention to these considerations confirms your financial metrics reflect the true health of your SaaS business. Let’s look closer:

• Upgrades and downgrades: Subscription changes directly impact MRR and ARR. Always account for upgrades, which increase revenue, and downgrades, which decrease it. Make sure your system accurately reflects these changes in real-time or at the end of each billing cycle.
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• Churn: Customer churn, the loss of subscriptions, significantly affects recurring revenue. Subtract revenue lost due to churn from your calculations. Implement a consistent method for tracking churn to maintain accurate metrics.
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• One-time payments: Exclude one-time payments, such as setup fees or consulting services, from MRR and ARR calculations. These non-recurring revenues do not represent consistent subscription income.
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• Contract lengths: When calculating ARR, normalize subscriptions of varying lengths to an annual basis. For example, a multi-year contract should be divided to reflect the annual revenue contribution. Ensure consistent handling of such contracts.
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• Currency fluctuations: If your business operates in multiple currencies, consider the impact of currency fluctuations on MRR and ARR. Use consistent exchange rates or implement hedging strategies to minimize discrepancies.

FAQs

How do upgrades and downgrades affect MRR?

Upgrades increase MRR by adding revenue from higher-tier subscriptions, while downgrades decrease it by reducing revenue from lower-tier subscriptions.

Can MRR be higher than ARR?

No, MRR cannot be higher than ARR; ARR is the annualized version of MRR, representing the yearly value of monthly recurring revenue.

How do one-time fees impact MRR and ARR calculations?

One-time fees should be excluded from both MRR and ARR calculations, as these metrics focus solely on recurring subscription revenue.

Which metric is more important for early-stage SaaS startups?

MRR is often more important for early-stage SaaS startups, as it provides a clearer view of immediate, month-to-month revenue trends.

How frequently should a SaaS company calculate MRR and ARR?

MRR should be calculated monthly for detailed tracking, and ARR should be calculated monthly or quarterly for broader strategic analysis.

Orb: The billing platform that helps keep your MRR and ARR high

You understand the importance of both MRR and ARR to your SaaS business. But are you equipped to manage these metrics effectively? Your billing platform plays a vital role in how you track, analyze, and optimize these key indicators.

Orb is a done-for-you billing platform designed to help SaaS and GenAI companies leverage their usage data, enabling adaptable pricing, precise billing, and faster growth — without the constraints of rigid billing systems.

We empower businesses to refine their monetization strategies, guaranteeing every contract contributes optimally to both your monthly and annual recurring revenue. By decoupling usage data from pricing metrics, Orb ensures accurate billing and provides a scalable, unified system.

Here’s how Orb supports your MRR and ARR strategies:

• Adapt pricing with agility: Quickly test and adjust pricing models to attract and retain valuable customers, directly influencing your MRR and ARR. Orb RevGraph separates usage and pricing metrics, allowing for dynamic experimentation and rapid price adjustments with Orb SQL Editor. Meanwhile, Orb Simulations empowers companies to test and optimize different pricing models based on historical data before rolling out changes.
  
  With Orb, you can efficiently identify pricing strategies that drive the highest growth in both monthly and annual revenue.
• Get billing accuracy: Deliver accurate and reliable billing and financial workflows that build customer trust and prevent revenue leakage, safeguarding your MRR and ARR.
  
  Orb RevGraph provides a single source of truth for precise, granular, and auditable usage-based billing, invoicing, and reporting, ensuring every contract is billed correctly and no revenue is lost. This level of precision is essential for maintaining consistent revenue streams reflected in both MRR and ARR.
• Scale confidently: Grow your business and your recurring revenue with tools and expertise designed for high performance and extensibility. Orb’s scalable API and robust tools, combined with expert guidance, ensure smooth operations as you expand.
  
  Orb offers a scalable, unified system that eliminates integration issues and supports high-volume data ingestion, allowing your MRR and ARR to scale with your business.

Ready to see how Orb can help you optimize your MRR and ARR? Explore Orb’s adaptable pricing options to find a plan that suits your needs and get started.