Monthly Recurring Revenue (MRR) vs Average Revenue Per User (ARPU)

Definition

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.

Common trap

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.

Practical use

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.

Formula

Definition

ARPU measures the average revenue generated per user or account over a specific period — typically monthly. If your SaaS earns $100K/month from 500 users, your ARPU is $200/month. ARPU is the simplest lever for growth: increasing ARPU by 20% has the same revenue impact as increasing your customer count by 20%, but without the acquisition cost. Slack's ARPU grew from $12 to $18/month per paid user by adding premium features, driving 50% revenue growth without proportional customer growth.

Common trap

The trap is treating ARPU as a single number when it's actually a blend of wildly different segments. If 80% of your users pay $10/month and 20% pay $500/month, your ARPU is $108 — a number that represents nobody. The $10 users are being over-served relative to their revenue, and the $500 users are likely under-served. Flying blind on a blended ARPU hides your real business: you're running two products at two price points.

Practical use

Calculate ARPU by segment, not just in aggregate. Split customers into at least 3 tiers (e.g., Starter, Pro, Enterprise) and track ARPU for each. Then identify your highest-ARPU segment and ask: 'How do I get more customers like THIS?' Track ARPU trend monthly — is it increasing (good: upsells working) or decreasing (bad: you're acquiring cheaper customers or discounting too aggressively)?

Formula