ARR vs MRR – What’s the Difference in SaaS?

If you spend time around SaaS companies, you’ll quickly notice a love for acronyms. Among the many financial terms, two stand out: ARR and MRR. At first glance, they look similar both measure recurring revenue. But they serve different purposes, are used by different teams, and can completely change how investors view your business.

This guide will break down ARR and MRR in simple terms, explain how to calculate each, highlight their key differences, and explore why both matter in SaaS. By the end, you’ll see why these two numbers are more than accounting jargon, they’re the foundation of how SaaS businesses plan, grow, and get valued.

What is MRR? (Monthly Recurring Revenue)

Monthly Recurring Revenue (MRR) is the predictable income a SaaS company earns each month from subscriptions. It strips out one-time payments or setup fees and focuses only on the steady flow of subscription revenue.

Example Calculation

• You have 100 paying customers.
• Each pays $50 per month.
• 100 × $50 = $5,000 MRR.

MRR is most useful for short-term tracking:

• How did last month compare to this month?
• Did that new pricing experiment work?
• How much monthly revenue was lost due to churn?

Because SaaS is usually subscription-based, MRR provides a quick, reliable snapshot of the business’s financial heartbeat.

What is ARR? (Annual Recurring Revenue)

Annual Recurring Revenue (ARR) looks at the same concept but across a full year. It shows the predictable subscription income you expect to earn annually from your customer base.

Example Calculation

• Your MRR is $5,000.
• $5,000 × 12 = $60,000 ARR.

ARR becomes particularly important when:

• You sell annual or multi-year contracts.
• You’re talking to investors or boards who care about long-term stability.
• You want to compare year-over-year growth without month-to-month noise.

Where MRR is a quick pulse check, ARR is the big-picture view of your revenue engine.

ARR vs MRR: Key Differences

Although closely related, ARR and MRR are used differently inside SaaS businesses.

Aspect	MRR (Monthly Recurring Revenue)	ARR (Annual Recurring Revenue)
Timeframe	Monthly snapshot of revenue	Annualized snapshot of revenue
Usage	Growth tracking, ops, short-term planning	Investor reports, strategic forecasts
Best For	Startups, SMB-focused SaaS	Enterprise SaaS, investor conversations
Calculation	Sum of all monthly subscriptions	MRR × 12 (or sum of all annual contracts)
Focus	Quick changes, experiments, churn impact	Long-term stability, valuations, fundraising

A simple analogy:

• MRR is your monthly paycheck.
• ARR is your annual salary.

Both matter, but you use them for different financial decisions.

How to Calculate ARR and MRR

MRR Formula

MRR = Number of active customers × Average monthly subscription

Example:

• 200 customers × $40 per month = $8,000 MRR.

ARR Formula

ARR = MRR × 12

Example:

• $8,000 MRR × 12 = $96,000 ARR.

Watch Out for One-Time Fees

Neither ARR nor MRR should include setup charges, consulting revenue, or any non-recurring income. Only recurring subscriptions count.

When to Use ARR vs MRR

Use MRR for:

• Tracking short-term performance (monthly growth, churn, new signups).
• Understanding how experiments (pricing, discounts, campaigns) affect revenue.
• Operational planning, like cash flow and budgeting.

Use ARR for:

• Investor reporting — ARR is a favorite metric in pitch decks and valuations.
• Strategic planning — annual budgets, revenue targets, and board reporting.
• Companies with mostly annual or multi-year contracts.

Example: A small SaaS startup with mostly monthly subscribers will rely heavily on MRR. A large enterprise SaaS selling annual licenses will lean on ARR.

Why ARR and MRR Matter in SaaS

1. Predictability
   Recurring revenue is what makes SaaS different from one-time software sales. ARR and MRR show stakeholders that your revenue stream is repeatable and stable.
2. Financial Planning

• MRR helps you forecast the next 30–90 days.
• ARR helps you budget for the next 12–24 months.

3. Valuations
   Investors often value SaaS companies based on ARR multiples. The higher your ARR and growth rate, the stronger your valuation potential.
4. Spotting Problems Early
   A sudden dip in MRR signals immediate issues (churn spike, billing failure). ARR gives you a broader perspective but won’t reveal daily or monthly fluctuations.

Advanced Considerations

• Expansion MRR: Revenue gained from upgrades and upsells.
• Contraction MRR: Revenue lost when customers downgrade.
• Net ARR: ARR adjusted for churn and expansion.
• Cohort Analysis: Studying churn and growth within customer groups over time.

As your SaaS scales, tracking just ARR and MRR won’t be enough — but they remain the foundation of more advanced metrics like Net Revenue Retention (NRR) and Customer Lifetime Value (CLV).

Common Mistakes to Avoid

1. Double Counting
   Don’t include both annual contracts and monthly equivalents at the same time.
2. Including Non-Recurring Revenue
   Exclude setup fees, consulting, or one-off services.
3. Mixing ARR and Bookings
   Bookings represent signed contracts, but revenue only counts once it’s recognized. ARR is about recurring, active revenue.

Conclusion

ARR and MRR may seem like similar acronyms, but they play different roles in the SaaS world.

• MRR is your monthly pulse check, perfect for tracking growth and churn.
• ARR is your long-term health report, ideal for planning, investors, and valuations.

Both matter. Think of MRR as the day-to-day fuel gauge and ARR as the annual road map. Together, they help SaaS companies understand their present health and future potential.