Annual Recurring Revenue (ARR)vsMonthly Recurring Revenue (MRR)

ARR is the annualized value of your recurring subscription revenue. It normalizes your monthly recurring revenue (MRR) into an annual sum (MRR × 12). For enterprise SaaS companies with multi-year contracts, ARR is the standard metric. If a customer signs a 3-year, $150,000 contract, that is $50,000 in ARR. Investors value SaaS companies based on ARR multiples (e.g., 10x ARR) because it represents highly predictable, compounding future revenue.

MRR is the predictable, recurring revenue your business earns every month from subscriptions. It's the heartbeat of any SaaS company. MRR is broken into 5 components: New MRR (from new customers), Expansion MRR (upgrades), Reactivation MRR (returning customers), Contraction MRR (downgrades), and Churned MRR (cancellations). Net New MRR = New + Expansion + Reactivation − Contraction − Churn. ARR = MRR × 12. VCs use MRR growth rate as the primary metric to evaluate SaaS companies — a 15%+ month-over-month growth rate signals a company worth investing in.

The most common trap is including non-recurring revenue like one-time implementation fees or professional services in the ARR calculation. If you charge $20,000 for software (recurring) and $10,000 for setup (one-time), your ARR from that customer is only $20,000. Inflating ARR with one-time fees destroys the predictability that makes ARR valuable in the first place.

The trap is inflating MRR by including non-recurring revenue. Annual contracts should be divided by 12 (not counted as one month). One-time setup fees, professional services revenue, and implementation charges are NOT MRR. Including them makes your business look recurring when it's actually project-based. If your MRR chart has spikes instead of a smooth upward curve, you're probably counting non-recurring revenue.

Calculate your true ARR strictly from recurring subscriptions: Current MRR × 12. Alternatively, sum the total annual value of all active contracts. Track your ARR Growth Rate year-over-year. To reach a $100M valuation at a conservative 10x multiple, you need to build an engine that consistently generates $10M in true ARR.

Calculate Net New MRR every month using all 5 components: Net New MRR = New MRR + Expansion MRR + Reactivation MRR − Contraction MRR − Churned MRR. Track each component separately because they tell different stories. If Churned MRR is growing even while New MRR is growing faster, you have a leaky bucket that will catch up to you. The best SaaS companies have Net Revenue Retention > 120%, meaning Expansion MRR alone exceeds Churned + Contraction.