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Finance & Operations
Revenue vs ARR vs MRR: Getting Your Numbers Right
Different revenue metrics mean different things. Here's how to calculate and use them correctly.
Revenue metrics are the most discussed numbers in SaaS, but founders often conflate or miscalculate them. Using the wrong metric or calculating it incorrectly undermines credibility with investors and leads to poor decisions.
Here’s how to get the numbers right.
The Core Metrics
Revenue
What it is: Money recognized for services delivered.
Key distinction: Recognized ≠ Collected
If a customer pays $1,200 upfront for an annual subscription:
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Cash collected: $1,200
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Revenue recognized in Month 1: $100
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Revenue recognized over 12 months: $1,200
Revenue recognition follows accounting rules (GAAP). You recognize revenue as you deliver value.
MRR (Monthly Recurring Revenue)
What it is: The monthly value of your recurring subscription contracts.
Formula:
MRR = Sum of all active subscriptions' monthly value
Example:
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50 customers on $100/month plan = $5,000
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20 customers on $200/month plan = $4,000
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MRR = $9,000
Annual contracts: Convert to monthly. A $1,200/year customer contributes $100 to MRR.
ARR (Annual Recurring Revenue)
What it is: The annualized value of recurring subscriptions.
Formula:
ARR = MRR × 12
Example:
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MRR = $9,000
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ARR = $108,000
ARR is just MRR projected over a year. It doesn’t mean you have annual contracts.
MRR Components
Breaking down MRR changes helps understand growth:
New MRR
Revenue from new customers acquired this period.
Calculation: Sum of first subscription payments from new customers.
Expansion MRR
Additional revenue from existing customers (upgrades, additional seats, higher usage).
Calculation: Increase in MRR from customers who were already paying last period.
Contraction MRR
Reduced revenue from existing customers (downgrades, reduced usage).
Calculation: Decrease in MRR from customers who are still paying but at a lower rate.
Churn MRR
Revenue lost from customers who cancelled.
Calculation: MRR from customers who were paying last period and are no longer paying.
Net New MRR
The total change in MRR:
Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churn MRR
Example:
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New MRR: $5,000
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Expansion: $2,000
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Contraction: $500
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Churn: $1,500
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Net New MRR: $5,000
Common Calculation Mistakes
Including One-Time Revenue
MRR/ARR should only include recurring revenue.
Don’t include:
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Setup fees
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Implementation services
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One-time purchases
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Training fees
These can be reported separately as professional services revenue.
Counting Trials as MRR
Trials are not MRR until they convert to paid subscriptions.
Counting Unpaid Invoices
If a customer is in collections or payment is failing, you may need to exclude them from MRR. Be consistent with your policy.
Annual Contracts Miscounting
An annual contract should be counted at its monthly equivalent, not the full annual amount.
Wrong: Customer pays $12,000/year → Add $12,000 to MRR
Right: Customer pays $12,000/year → Add $1,000 to MRR
Usage Revenue Estimation
For usage-based pricing, you can estimate MRR based on trailing usage, but this is less reliable than fixed subscriptions. Be clear about methodology.
Gross vs. Net Revenue Retention
Gross Revenue Retention (GRR)
What you keep from existing customers, ignoring expansion:
GRR = (Beginning MRR - Churn - Contraction) / Beginning MRR
Example:
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Beginning MRR: $100,000
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Churn: $3,000
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Contraction: $2,000
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GRR = ($100,000 - $3,000 - $2,000) / $100,000 = 95%
GRR is always ≤ 100%.
Net Revenue Retention (NRR / NDR)
What you keep including expansion:
NRR = (Beginning MRR - Churn - Contraction + Expansion) / Beginning MRR
Example:
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Beginning MRR: $100,000
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Churn: $3,000
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Contraction: $2,000
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Expansion: $10,000
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NRR = ($100,000 - $3,000 - $2,000 + $10,000) / $100,000 = 105%
NRR > 100% means you’d grow even without new customers.
Benchmarks
GRR:
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90%+: Excellent
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85-90%: Good
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< 85%: Concerning
NRR:
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120%+: World-class (enterprise SaaS)
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100-120%: Healthy
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< 100%: Churn exceeds expansion
Reporting Best Practices
Be Consistent
Whatever methodology you choose:
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Document it
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Apply it consistently
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Don’t change it to make numbers look better
Show Components
Don’t just report MRR. Show:
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New MRR
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Expansion MRR
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Churn MRR
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Net New MRR
This tells a richer story about growth quality.
Graph Trends
Single-point metrics don’t tell the story. Show:
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MRR over time (12+ months)
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Net new MRR trend
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Retention cohorts
Separate Revenue Types
If you have multiple revenue types:
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Subscription (recurring)
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Professional services
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Usage-based
Report them separately. Mix them and you obscure the picture.
ARR for Investor Communication
When to Use ARR vs. MRR
Use MRR when:
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Internal tracking
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Monthly reporting
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Operational decisions
Use ARR when:
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Investor conversations (it’s the standard)
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Fundraising materials
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Comparing to industry benchmarks
Committed ARR vs. Live ARR
Committed ARR: Includes signed contracts not yet live.
Live ARR: Only includes active, paying customers.
Be clear which you’re reporting. Investors usually want live ARR.
ARR Milestones
Common fundraising milestones:
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$100K ARR: Early traction
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$1M ARR: Meaningful business
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$5M ARR: Series A territory
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$10M+ ARR: Series B territory
These vary by market and era, but they’re common benchmarks.
Key Takeaways
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Revenue is recognized; MRR/ARR is the value of recurring subscriptions
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MRR = sum of monthly subscription values; ARR = MRR × 12
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Track MRR components: new, expansion, contraction, churn
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Don’t include one-time fees, trials, or non-recurring revenue in MRR
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Net Revenue Retention above 100% means growth even without new customers
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Be consistent in methodology and document your approach
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Show trends and components, not just single numbers
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Use ARR for investor communication, MRR for internal tracking
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