What is MRR (Monthly Recurring Revenue)?
Definition
MRR (Monthly Recurring Revenue) is the amount of predictable revenue your business generates each month from active subscriptions. It's calculated by normalizing all subscription revenue to a monthly value, regardless of billing frequency.
MRR is the heartbeat of a SaaS business. It tells you exactly how much recurring revenue you can count on each month, making it essential for cash flow planning, growth tracking, and operational decision-making.
For example, if you have 50 customers paying $200/month and 20 customers paying $2,400/year (normalized to $200/month), your MRR is (50 + 20) × $200 = $14,000.
How to Calculate MRR
Basic MRR Formula
For customers on monthly plans, use their monthly payment. For annual plans, divide by 12.
Example:
- • 100 customers at $50/month = $5,000
- • 50 customers at $100/month = $5,000
- • 10 customers at $12,000/year = $10,000 (normalized to $1,000/month each)
- Total MRR: $20,000
Important:
Only include recurring subscription revenue. Exclude one-time setup fees, professional services, and variable usage charges (unless they're consistent and predictable).
Understanding MRR Movement
Tracking how MRR changes each month is more valuable than the absolute number. There are four key components:
New MRR
Monthly recurring revenue from brand new customers acquired this month.
Example: Acquired 10 new customers at $100/month = $1,000 New MRR
Expansion MRR
Additional MRR from existing customers who upgraded, added seats, or expanded usage.
Example: 5 customers upgraded from $50/month to $100/month = $250 Expansion MRR
Contraction MRR
MRR lost from existing customers who downgraded to cheaper plans.
Example: 3 customers downgraded from $100/month to $50/month = -$150 Contraction MRR
Churned MRR
MRR lost from customers who canceled their subscription completely.
Example: 8 customers at $100/month canceled = -$800 Churned MRR
Net New MRR Formula
Example Month:
- • Starting MRR: $20,000
- • New MRR: +$1,000
- • Expansion MRR: +$250
- • Contraction MRR: -$150
- • Churned MRR: -$800
- Ending MRR: $20,300 (+$300 or +1.5% growth)
Why MRR Matters
1. Cash Flow Predictability
MRR tells you exactly how much revenue to expect next month (assuming no major changes). This makes budgeting, hiring, and investment decisions much easier than for businesses with unpredictable revenue.
2. Growth Measurement
Month-over-month MRR growth is the most actionable metric for SaaS companies. It shows whether your business is growing, stagnating, or declining in real-time.
3. Problem Detection
Breaking down MRR movement helps you spot issues early. If New MRR is growing but Net MRR is flat, you have a churn problem. If Expansion MRR is zero, you're not upselling effectively.
4. Operational Decisions
MRR helps answer questions like: "Can we afford to hire another developer?" or "Should we increase marketing spend?" If MRR is growing 10% monthly, you have more flexibility than at 2% growth.
MRR vs ARR: When to Use Each
Use MRR For:
- ✓Monthly growth tracking and operational metrics
- ✓Cash flow planning and budgeting
- ✓Internal dashboards and team KPIs
- ✓Early-stage companies (pre-$1M ARR)
- ✓Identifying trends and problems quickly
Use ARR For:
- ✓Investor communications and presentations
- ✓Company valuation discussions
- ✓Long-term strategic planning
- ✓Growth-stage companies ($1M+ revenue)
- ✓Industry benchmarking and comparisons
Simple Rule: Use MRR for running your business day-to-day, use ARR for fundraising and strategic discussions. Convert between them easily: ARR = MRR × 12.
Common MRR Mistakes to Avoid
❌ Including One-Time Revenue
Setup fees, professional services, and one-time charges should never be included in MRR. Only recurring subscription revenue counts.
❌ Forgetting to Normalize Annual Contracts
If a customer pays $12,000 upfront annually, add $1,000/month to MRR, not $12,000 to one month. This gives accurate monthly revenue tracking.
❌ Not Tracking MRR Movement Components
Simply tracking total MRR isn't enough. You need to understand New, Expansion, Contraction, and Churned MRR to identify growth drivers and problems.
❌ Counting Free Trial Users
Only paying customers count toward MRR. Don't include free trials, freemium users, or customers with expired credit cards who haven't paid yet.
Frequently Asked Questions
What is the difference between MRR and ARR?
MRR (Monthly Recurring Revenue) is the monthly version of ARR (Annual Recurring Revenue). ARR = MRR × 12. MRR is better for tracking month-to-month changes and operational metrics, while ARR is used for valuation and long-term planning.
Should I include annual contracts in MRR?
Yes, but normalize them to monthly. If a customer pays $12,000 upfront for a year, add $1,000/month to MRR. This gives you an accurate picture of monthly recurring revenue regardless of billing frequency.
How often should I calculate MRR?
Calculate MRR at the end of each month. Track changes from the previous month (New MRR, Expansion MRR, Contraction MRR, Churned MRR) to understand growth drivers and identify problems early.
Track Your MRR
Use our free ARR/MRR calculator to track your monthly recurring revenue and movement components.
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