What is ARR vs MRR?
ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue) both measure recurring subscription revenue, but ARR annualizes the figure while MRR tracks it monthly. ARR is used for strategic planning and board reporting; MRR is used for operational monitoring.
ARR and MRR are the two core revenue metrics in SaaS. MRR is your total monthly recurring subscription revenue. ARR is MRR multiplied by 12. They measure the same underlying thing on different time scales, but the choice of which to emphasize signals how a company thinks about its business and growth trajectory.
ARR vs MRR Formulas
MRR = Sum of all monthly subscription revenue from active customers. ARR = MRR x 12. If you have 200 customers paying an average of $2,500/month, MRR is $500K and ARR is $6M. Both metrics should exclude one-time fees, professional services, and usage-based overages unless those overages are contractually recurring. Some companies include contracted usage minimums in ARR but exclude variable overage. Consistency matters more than the exact definition, just document your methodology and stick with it.
When to Use ARR vs MRR
Use ARR for board reporting, fundraising, valuation discussions, and annual planning. Investors think in ARR because SaaS valuations are expressed as multiples of ARR. Use MRR for monthly operating reviews, churn analysis, and short-term forecasting. MRR is more sensitive to month-over-month changes, making it better for spotting trends early. Companies below $1M ARR often report MRR because the monthly number feels more meaningful at small scale. Above $5M ARR, most companies shift to ARR as the primary metric.
MRR Components
MRR breaks down into five components that tell the full story of revenue health. New MRR: revenue from brand-new customers acquired this month. Expansion MRR: additional revenue from existing customers (upgrades, add-ons, seat expansion). Reactivation MRR: revenue from previously churned customers who return. Contraction MRR: revenue lost from existing customers who downgraded. Churned MRR: revenue lost from customers who canceled entirely. Net New MRR = New + Expansion + Reactivation - Contraction - Churned. CROs who only track top-line MRR without this decomposition miss the story. A company adding $200K in new MRR but losing $180K to churn and contraction has a retention problem that the headline number hides.
Why CROs Need Both Metrics
A CRO reporting to the board uses ARR to show trajectory and scale. The same CRO running weekly pipeline reviews uses MRR to track bookings velocity and churn in real time. The disconnect happens when finance calculates ARR differently than sales calculates it. If finance excludes multi-year prepaid deals and sales includes them, the ARR number won't match, and the board will ask uncomfortable questions. Alignment between sales and finance on ARR methodology should happen before the first board meeting.
Common Mistakes
Annualizing a single strong month to claim ARR growth. If January MRR is $600K and February spikes to $750K because of a large deal, claiming $9M ARR based on February alone is misleading. Use trailing-3-month average MRR annualized to smooth out lumpy months. Another mistake: including non-recurring revenue in ARR. Professional services, one-time implementation fees, and hardware sales don't belong in ARR. Investors will catch this during diligence and it damages credibility.
In Practice
Build a monthly MRR waterfall that shows each component: starting MRR, new, expansion, reactivation, contraction, churn, ending MRR. Present this in every monthly revenue review. The waterfall makes problems visible. If expansion MRR has declined three months in a row, your CS team needs to investigate. If new MRR is growing but churn is growing faster, your net retention is degrading even though the sales team feels productive. Annualize the ending MRR each month to get your current-run-rate ARR, and track it alongside your committed ARR (contracts signed regardless of when revenue starts) to see the full picture.
Get Weekly Sales Intelligence
Join 500+ sales executives getting compensation data, market trends, and career intelligence.
Subscribe Free