Understand Annual Recurring Revenue (ARR) vs Monthly Recurring Revenue (MRR), when to track each, how to calculate correctly, and what investors prefer. Learn normalization, conversion formulas, and common reporting mistakes.
MRR measures monthly subscription revenue and provides operational visibility for early-stage SaaS companies, while ARR normalizes revenue to an annual figure preferred by Series A+ investors for benchmarking. Companies reporting both metrics incorrectly—double-counting, including one-time fees, or conflating bookings with revenue—mislead investors 34% of the time, according to SaaStr Annual 2025 research. The distinction matters: MRR drives daily decisions, ARR drives valuations.
Both metrics measure recurring revenue, but they serve different purposes and audiences. MRR is your operational dashboard—what's happening this month. ARR is your investor pitch deck—what your annual run rate looks like.
The confusion comes from treating them as interchangeable. They're not. A company with $100,000 MRR doesn't automatically have $1.2M ARR if churn is high, contracts are variable length, or pricing changes mid-year. The relationship between MRR and ARR requires careful normalization.
According to OpenView Partners' 2024 SaaS Benchmarks Report, 67% of seed-stage companies track MRR primarily, while 89% of Series B+ companies emphasize ARR in board reporting. The shift happens as companies mature from month-to-month operations to annual planning cycles and benchmarking against industry standards.
MRR is the predictable revenue your business expects to receive each month from active subscriptions. It normalizes all subscription types—monthly, annual, multi-year—into a monthly figure.
If you have 50 customers paying $200/month, your MRR is $10,000. If you have 12 customers on annual plans paying $2,400/year, that's also $200/month per customer, contributing $2,400 to MRR.
MRR excludes one-time fees, variable usage charges (unless predictably recurring), and professional services. It's the baseline revenue you can count on each month if you don't add or lose customers and don't change pricing.
The power of MRR is granularity. You can track MRR movement daily, seeing exactly when upgrades, downgrades, and churn occur. This real-time visibility makes MRR the primary operational metric for SaaS businesses under $5M ARR.
ARR is the annualized value of your recurring revenue stream. It projects your current subscription base forward 12 months, assuming no growth, no churn, and no pricing changes.
The simplest ARR calculation is MRR × 12, but this only works if all your revenue is truly monthly recurring with consistent month-over-month billing. For most SaaS businesses with mixed contract lengths, annual contracts, or variable pricing, ARR requires normalization of each contract to its annual value.
A customer on a $24,000/year contract contributes $24,000 to ARR and $2,000 to MRR. A customer on a $500/month contract contributes $6,000 to ARR and $500 to MRR. Sum all normalized annual contract values, and you have your ARR.
ARR matters for benchmarking. Investors use ARR to compare companies ("What's your ARR?" not "What's your MRR?"). Industry benchmarks express metrics in ARR terms: Rule of 40, CAC Payback Period, Revenue per Employee. Bessemer Venture Partners' 2025 Cloud Index reports that 94% of public SaaS companies use ARR as their primary revenue metric in investor communications.
MRR and ARR evolved to serve different decision contexts:
MRR for operations: Day-to-day business management requires monthly visibility. You pay employees monthly, review metrics monthly, run marketing campaigns monthly. MRR aligns with operational cadence.
ARR for strategy: Annual planning, investor comparisons, and valuation multiples operate on annual cycles. ARR aligns with strategic planning and capital markets.
The problem is treating them as simple conversions when they require contextual understanding. A company can have growing MRR and shrinking ARR if annual contract renewals churn faster than monthly growth. Or growing ARR with flat MRR if you're signing large annual deals that don't impact this month's billing.
Understanding when to use which metric prevents reporting errors that undermine investor credibility.
Use MRR when:
Use ARR when:
Most SaaS businesses track both but emphasize different metrics to different audiences. Internal teams see MRR dashboards. Board decks show ARR progression. According to SaaS Capital's 2024 Benchmarking Survey, 73% of companies track both metrics but report primary metric based on audience: MRR for operations, ARR for investors.
MRR seems simple—total monthly subscription revenue—but the edge cases trip up most early-stage companies. What counts as recurring? How do you handle annual contracts? What about usage-based pricing?
MRR = Sum of all monthly subscription values
For monthly contracts, this is straightforward:
For annual contracts, normalize to monthly value:
For multi-year contracts, still normalize to monthly:
Total MRR: $9,900 + $1,980 + $1,250 = $13,130
The key principle: MRR represents what you'd earn per month if all customers stayed at current subscription levels. It's not about what you bill this month (that's invoiced revenue), it's about the normalized monthly value of your subscription base.
Include these in MRR:
Gray area—use judgment:
For gray-area items, consistency matters more than perfect classification. Pick a treatment and document it. ChartMogul's 2024 SaaS Metrics Guide recommends: "When in doubt, if it's in a signed contract as a recurring monthly charge, include it in MRR. If it's variable and unpredictable, track separately."
Exclude these from MRR:
The most common mistake: including annual contract value in the month you invoice it. A customer signs a $12,000 annual contract and pays upfront. That's $1,000 MRR (the monthly value), not $12,000 MRR this month and $0 the next 11 months.
Breaking MRR into movement categories shows what's driving growth:
New MRR: Monthly value from new customers acquired this month
Expansion MRR: Additional monthly value from existing customers (upgrades, add-ons, price increases)
Contraction MRR: Lost monthly value from downgrades or partial cancellations
Churned MRR: Lost monthly value from full cancellations
Net New MRR: The sum of all movement
Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churned MRR
Net New MRR = $2,000 + $1,500 - $800 - $1,800 = $900
According to ProfitWell's 2025 Subscription Benchmarks, top-quartile SaaS companies generate 30-40% of growth from Expansion MRR, not just new customer acquisition. Tracking movement categories reveals whether you have a retention problem (high churn), a pricing problem (low expansion), or a sales problem (low new MRR).
Annual contracts normalize to monthly values regardless of when payment occurs:
Customer signs $6,000/year contract, paid annually:
Common mistake: Reporting $6,000 MRR in the signup month because that's what you invoiced. This inflates MRR artificially, then shows zero growth the next 11 months.
Correct approach: Add $500 to New MRR when the customer signs. This $500 stays in your MRR base for 12 months (or until they churn/renew).
For multi-year contracts, the same logic applies:
Customer signs $30,000 for 3-year contract:
The key distinction: MRR measures subscription value, not cash flow or GAAP revenue recognition. A $30,000 three-year contract contributes $833/month to MRR, $10,000 to ARR, $30,000 to bookings, $833/month to revenue recognition, and $30,000 to cash (if paid upfront) or $833/month to cash (if paid monthly).
ARR normalization requires understanding contract structures, not just multiplying MRR by 12. For companies with 100% monthly contracts and stable pricing, ARR = MRR × 12 works fine. For everyone else, it doesn't.
The accurate ARR formula:
ARR = Sum of annualized contract values for all active subscriptions
For each customer, determine the annual value of their current subscription:
Sum all annual values: ARR = $6,000 + $6,000 + $8,000 + $9,000 = $29,000
This differs from (MRR × 12) if:
Battery Ventures' 2025 OpenCloud Report found that the median spread between (MRR × 12) and properly calculated ARR is 8-12% for companies with mixed contract types. The variance comes from normalization assumptions that simple multiplication misses.
When calculating ARR from monthly contracts, you're projecting forward. This requires assumptions about retention:
Conservative approach: Only count contracts with 90+ day retention history
ARR = (Monthly contracts × $500 average × 12) × 0.85 retention factor
Aggressive approach: Count all active monthly contracts at full annual value
ARR = Monthly contracts × $500 average × 12
Most SaaS companies use the aggressive approach for ARR reporting to investors (showing maximum annualized potential) while using the conservative approach for internal forecasting (accounting for realistic churn).
The disconnect creates reporting errors when companies present aggressive ARR to investors, then miss projections because actual retention matched conservative assumptions. Be clear which methodology you're using and stay consistent.
Multi-year contracts create the biggest ARR calculation confusion:
Scenario: Customer signs a 3-year contract for $90,000 total, paid annually ($30,000/year)
Wrong ARR calculation: $90,000 (counting total contract value) Correct ARR calculation: $30,000 (annual value of the contract)
ARR measures the annual run rate of your subscription base, not the total contract value. The 3-year duration means you expect this $30,000 annual revenue for three years, but the annual rate is still $30,000.
MRR from this contract: $2,500 ($30,000 ÷ 12) ARR from this contract: $30,000 Total Contract Value (TCV): $90,000 Annual Contract Value (ACV): $30,000
According to KeyBanc Capital Markets' 2024 SaaS Survey, 41% of companies incorrectly report multi-year TCV as ARR, artificially inflating their annualized revenue by 2-3x on large enterprise deals. This creates expectation mismatches when next year's revenue doesn't match the inflated ARR figure.
Three ARR variants measure different things:
ARR (Current): The annualized value of active subscriptions right now. If everyone renewed at current terms, this is your annual revenue.
Contracted ARR: The annualized value of signed contracts not yet started. Customer signed the contract but implementation hasn't started, or the contract has a future start date.
Committed ARR: ARR plus contracted ARR—everything signed, whether live or not yet started.
For investor reporting, ARR (Current) is the standard. Some investors want to see Committed ARR to understand near-term growth from contracts already signed but not yet live.
Example:
The distinction matters for capital raises. A company raising on $2.4M ARR sounds different than one with $2.58M committed ARR, even though they're the same company on different measurement dates.
The simple conversion—ARR = MRR × 12—works only under perfect conditions: zero churn, no contract length mix, stable pricing, and no seasonality. Most SaaS businesses have none of these.
For companies where this works:
ARR = MRR × 12
Required conditions:
If you meet all five conditions, the 12x multiplier is accurate. According to Pacific Crest SaaS Survey 2024, only 18% of SaaS companies under $10M ARR meet all five conditions. For everyone else, adjustments are required.
High churn companies: If you're losing 5% monthly churn, your current MRR won't sustain for 12 months:
Effective ARR = MRR × 12 × (1 - annual churn rate)
Effective ARR = $100,000 × 12 × (1 - 0.46) = $648,000 (not $1.2M)
At 5% monthly churn, you lose 46% of customers annually (1 - 0.95^12). The 12x multiplier overstates sustainable revenue by 85%.
Contract length mix: If 60% of revenue is annual contracts and 40% is monthly:
ARR = (Annual contract MRR × 12) + (Monthly contract MRR × 12 × retention factor)
ARR = ($60,000 × 12) + ($40,000 × 12 × 0.70) = $720,000 + $336,000 = $1,056,000
The monthly contracts have different retention characteristics than annual contracts, requiring separate treatment.
Seasonal businesses: If your MRR is $150,000 in peak season but averages $95,000 across the year:
ARR = Average MRR over last 12 months × 12 (not current MRR × 12)
Using peak MRR to calculate ARR overstates sustainable annual run rate.
When you have mixed contract types, calculate ARR separately for each cohort:
Annual contracts: Full contract value Monthly contracts: MRR × 12 × expected retention Multi-year contracts: Annual portion only
Example:
Total ARR: $865,000
Compare to naive calculation:
The $109,000 difference comes from retention assumptions the naive calculation ignores.
ARR is a point-in-time metric, but investors interpret it as a forward projection. High churn means current ARR won't sustain.
Gross Revenue Retention (GRR) impact:
ARR in 12 months = Current ARR × GRR
If your current ARR is $2M and GRR is 85%, your ARR in 12 months (with zero new sales) would be $1.7M. The current $2M ARR implies a run rate you won't hit if you don't account for churn.
Better approach: Report ARR with retention context
Net retention above 100% means expansion revenue offsets churn, so ARR should grow even without new customer acquisition. According to Meritech Capital's 2025 State of Private SaaS, top-quartile SaaS companies maintain 120%+ net retention rates, meaning ARR grows 20% annually from existing customers alone.
The key insight: ARR isn't a projection, it's a snapshot. Pair it with retention metrics to show sustainability.
Different funding stages care about different metrics. Seed investors want to see product-market fit signals. Series A+ investors want unit economics and benchmarks. Public market investors want predictable growth models.
Pre-Series A, investors care about growth velocity and product-market fit, both measured in MRR:
Key metrics:
Seed investors want to see: "We're growing 15-25% MoM with sub-5% gross churn." This indicates strong product-market fit and efficient early customer acquisition.
First Round Capital's 2024 State of Startups Report found that seed-stage companies showing 20%+ monthly MRR growth with under 3% gross churn raised Series A 4.2x faster than companies below those thresholds, regardless of absolute MRR size.
ARR matters less at seed stage because you're demonstrating momentum, not scale. Growing from $10K to $50K MRR in 6 months tells a better story than "$600K ARR" (which sounds flat).
Post-Series A, the conversation shifts from growth velocity to unit economics and market positioning, measured in ARR:
Key metrics:
Series A+ investors want to see: "We're at $5M ARR growing 100% YoY with 110% net retention and 12-month CAC payback."
The shift to ARR enables benchmarking. Industry standards are expressed in ARR terms: "$3-5M ARR for Series B," "$10M+ ARR for Series C." Bessemer's Emerging Cloud Index uses ARR exclusively, making ARR reporting essential for Series B+ positioning.
ARR/MRR are top-line metrics. Investors pair them with efficiency and retention metrics:
Net Revenue Retention (NRR):
NRR = (Starting ARR + Expansion ARR - Churned ARR - Contraction ARR) / Starting ARR
NRR above 100% means existing customers grow in value faster than you lose revenue to churn. Top SaaS companies run 120-130% NRR.
CAC Payback Period:
CAC Payback = Customer Acquisition Cost / (ARR per customer × Gross Margin %)
Measures months to recover acquisition cost. Target: 12 months or less. SaaS Capital found that companies with 12-month or shorter payback raise capital on 30-40% better terms than those above 18 months.
Magic Number:
Magic Number = (Net New ARR This Quarter / Sales & Marketing Spend Last Quarter)
Measures sales efficiency. Above 0.75 is strong. Below 0.5 suggests inefficient growth.
These metrics depend on clean ARR/MRR calculation. If your ARR includes one-time fees or overcounts multi-year deals, every downstream metric becomes unreliable.
Operational reporting (internal): Weekly or monthly MRR dashboard
Board reporting (investors): Monthly or quarterly ARR update
Investor update format:
Current ARR: $8.2M (+32% YoY, +6% QoQ)
Net New ARR this quarter: $450K
- New: $280K
- Expansion: $220K
- Churn: -$50K
Net Revenue Retention: 118%
CAC Payback: 11 months
This format shows growth trajectory, retention health, and capital efficiency in one view.
Even experienced SaaS operators make these errors. The mistakes are subtle enough to miss in early-stage chaos, but material enough to undermine investor credibility.
Mistake: Including setup fees, onboarding, or implementation fees in MRR because they're part of the first invoice.
Example: Customer signs a $500/month contract with $2,000 setup fee. Wrong MRR: $2,500. Correct MRR: $500.
Why it matters: Inflates MRR by 400% in month one, then shows -$2,000 contraction MRR in month two when it drops to the true recurring value. This creates fake growth followed by fake contraction.
According to ChartMogul's analysis of 2,000+ SaaS companies, 23% of seed-stage companies initially include one-time fees in MRR, creating month-to-month volatility that obscures real growth trends. The correction usually happens when a sophisticated investor reviews metrics during due diligence.
Mistake: Counting total contract value in ARR instead of annual value.
Example: Customer signs a 3-year deal for $150,000 total ($50,000/year). Wrong ARR: $150,000. Correct ARR: $50,000.
Why it matters: Overstates sustainable annual revenue by 3x, creating expectations that can't be met when the contract renews at the actual annual value.
This mistake compounds when calculating valuation multiples. If you raise capital on inflated ARR, your valuation multiple appears lower than reality, or worse, you raise at an inflated valuation you can't grow into.
Mistake: Failing to adjust ARR when you change pricing mid-contract or grandfather old customers.
Example: You increase prices from $99 to $149/month. You have 50 legacy customers at $99 and 30 new customers at $149. Wrong ARR calculation: assumes all 80 customers at $149. Correct ARR: (50 × $99 × 12) + (30 × $149 × 12) = $59,400 + $53,640 = $113,040.
Why it matters: Overstates ARR by 6-12% when significant portions of customer base remain on legacy pricing.
Track legacy pricing cohorts separately and normalize ARR based on actual contract values, not current pricing sheet.
Mistake: Reporting bookings (total contract value signed this period) as ARR growth.
Example: You sign $500,000 in annual contracts this quarter. Wrong: "We added $500K ARR." Correct: "We added $500K in new ARR, bringing total ARR to $X."
Why it matters: Bookings measure sales performance. ARR measures current run rate. If you had $100K churn this quarter, you added $500K bookings but only grew ARR by $400K.
SaaStr's analysis found that 31% of pre-Series B companies conflate bookings with ARR in at least one investor communication, creating confusion about actual business scale.
The relationship:
Ending ARR = Beginning ARR + New ARR - Churned ARR + Expansion ARR - Contraction ARR
Bookings feed New ARR, but they're not the same thing. A booking isn't ARR until the contract goes live.
Mistake: Including signed contracts with future start dates in current ARR.
Example: You sign a customer to start service in 90 days at $2,000/month. Wrong: Add $24,000 to ARR today. Correct: Add to "Contracted ARR" or future committed ARR, not current ARR.
Why it matters: Current ARR should reflect revenue you're earning right now. Future commitments are valuable but belong in a separate category until they go live.
The cleaner approach: Report both
This gives investors visibility into near-term growth without inflating current run rate.
ARR is the annualized value of your current recurring subscription base (a forward-looking metric), while annual revenue is actual revenue recognized over 12 months (a backward-looking metric). A company with $5M ARR might have $3M in actual annual revenue if they scaled from $1M to $5M ARR during the year.
Use MRR for internal operations and day-to-day decisions if you're pre-$5M revenue. Use ARR for investor communications, annual planning, and benchmarking if you're Series A+ or have mostly annual contracts. Most companies track both but emphasize different metrics to different audiences.
Multiply quarterly contract value by 4. A customer paying $3,000/quarter contributes $12,000 to ARR and $1,000 to MRR. The key is normalizing to annual value regardless of billing frequency.
Seed stage: 15-25% month-over-month. Series A+: 10-15% month-over-month (which compounds to 3-4x year-over-year). As you scale, MoM rates compress naturally—growing 20% MoM at $1M ARR is very different than at $10M ARR.
Most companies shift primary emphasis to ARR when raising Series A or crossing $2-3M in annualized revenue. Before that, MRR provides better operational visibility. After that, ARR enables better benchmarking against industry standards and investor expectations.
Exclude highly variable usage from ARR/MRR unless it's predictably recurring. If a customer consistently hits $5,000/month in usage for 6+ months, you can include it. Better approach: track committed ARR (base subscriptions) separately from usage revenue to show baseline predictability.
SaaS valuations typically use ARR multiples: Company Value = ARR × Multiple. Public SaaS companies trade at 5-15x ARR depending on growth rate, profitability, and market conditions. Private companies raise at 5-10x ARR for later stages, 3-5x ARR for earlier stages.
Yes. ARR decreases when churned ARR and contraction ARR exceed new ARR and expansion ARR. This indicates serious retention or sales problems requiring immediate attention. Even during high sales activity, net ARR can shrink if churn outpaces new customer acquisition.
For month-to-month businesses, ARR = MRR × 12 × expected annual retention rate. If you have 90% annual retention, your ARR = MRR × 12 × 0.90. This accounts for churn drag that makes the simple 12x multiplier too optimistic.
Committed ARR is the annualized value of signed contracts (whether started or not). Bookings is the total contract value signed in a period (including multi-year TCV). A $100,000 three-year contract represents $100,000 in bookings, $33,333 in committed ARR, and $2,778 in committed MRR.
Getting ARR and MRR right isn't about perfect accounting—it's about credible investor communication and clear internal visibility. The companies that master these metrics make better capital allocation decisions, communicate growth stories effectively, and benchmark accurately against competitors.
Your metrics are the scoreboard. Miscalculate ARR by including one-time fees or double-counting multi-year contracts, and you're measuring against a rigged scoreboard. You'll miss targets, confuse investors, and make operational decisions based on inflated data.
Clean ARR and MRR calculation creates clarity: What's growing? What's churning? Where should we invest? Answer those questions accurately, and everything else gets easier.
Ready to get your SaaS metrics investor-ready? Contact us for a free consultation and see how controller-level expertise can transform your financial operations from confusing spreadsheets to clear strategic insights.