MRR vs. ARR: How to choose the right recurring revenue metric for your business

For SaaS companies, recurring revenue is central to your business model. Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) are your best bet for tracking growth and predicting revenue.

Both metrics track your recurring revenue over time, with the split being into short-term and long-term time frames. ARR is the more common of the two, but each has its reasons for being more relevant under certain circumstances.

SaaS businesses rely on a subscription-based model where customers are paying to access a platform monthly or annually.

Monthly Recurring Revenue (MRR) is the subscription revenue you expect to generate from existing customers over a month, and Annual Recurring Revenue (ARR) is that same expected subscription revenue but generated over a year.

MRR is the total value of customer subscriptions over a month period. It can also be calculated with average revenue numbers.

MRR = Average revenue per user (month) X # of users

If you have 10 subscribers paying $200 a month and 20 subscribers paying $100 a month, then your MRR would be $4000 (20010 + 10020).

If you have your MRR already, multiplying it by 12 gets you your ARR.

If not, the same equation still applies, just with new terms.

ARR = Average revenue per user (year) X # of users

Both MRR and ARR are helpful financial metrics for SaaS businesses, providing time-specific snapshots about recurring revenue for subscription-based companies.

By tracking your recurring revenue on a monthly or annual basis, you can:

• Track growth: recurring revenue rates are helpful measures of business growth. If your recurring revenue is increasing over time, it’s a good indicator that your customer acquisition and retention are effective. On the other hand, if recurring revenue is declining, it means you might need to reconsider your approach to customer acquisition and reduce churn rates.
• Improve financial forecasting: MRR and ARR estimate the revenue your business expects to generate over a specific time period, based on your current subscriber base. This can help when forecasting your revenue for the months and years ahead.
• Track short-term or long-term revenue changes: by comparing MRR month-on-month (or ARR year-on-year), you can identify changes in your subscriber base and recurring revenue. This can then be the springboard for you to dive deeper into other financial metrics to pinpoint what might be causing growth or decline in your revenue.

Ultimately, SaaS businesses should be using both ARR and MRR to gain deeper insights into their revenue in the short and long term.