ARR and MRR

Recurring-revenue businesses are judged less by last month's invoice total and more by the stock of future subscription dollars they already own. That stock is ARR (annual recurring revenue) or MRR (monthly recurring revenue).

Recurring revenue renews on a contract or subscription without a new sale each period. A one-time professional-services invoice is not recurring. A $500/month seat license is.

The big idea

ARR is a reservoir, not a tap. The tap is this month's invoices. The reservoir is the run-rate you would have if every active subscription kept paying for a year.

The analogy breaks when you mix annual prepaid contracts, multi-year deals, usage overages, and one-time fees into the same bucket. The discipline is to define recurring and stick to it.

Walking through it

ARR = MRR × 12

Most early SaaS companies live in MRR dashboards. Most later-stage and enterprise-heavy companies live in ARR. Convert carefully. That identity breaks when usage add-ons and multi-year structure are stuffed into "MRR."

Include

• Subscription fees for seats, modules, or platforms
• Contracted minimums on usage plans (the committed floor)
• Recurring support or success fees that renew with the product

Usually exclude (or report separately)

• One-time implementation, training, and professional services
• Hardware and pass-through costs
• Purely variable usage above the committed minimum (track as usage revenue)
• Marketplace take rates that are not subscription-like — see marketplace economics

ACV is what a new or renewing deal is worth per year. ARPA / ARPU (average revenue per account or user) is ARR divided by customers. Growing ARPA via expansion is often healthier than buying the same ACV over and over at rising CAC.

A customer on $2,000/month is $24,000 of ARR. That is the stock. What happened to the stock this year is the ARR bridge.

Common mistakes

• Folding implementation into ARR. That is a project, not a subscription.
• Calling variable usage "ARR" when the customer did not commit. The floor can be ARR. The spike may not be.
• Comparing two companies' ARR without reading the definition box.
• Using ARR as cash. See bookings vs revenue.

Check yourself

A customer pays $120k for a year of software plus $30k for a one-time implementation. How much ARR?

$120k. The $30k is services, reported separately.

When would ARR = MRR × 12 mislead you?

When MRR is stuffed with one-time fees, uncommitted usage, or multi-year quirks.

Key takeaways

• ARR/MRR measure the stock of recurring subscription value.
• Include subscriptions and committed minimums. Exclude one-time services and uncommitted usage.
• ACV is a deal's yearly worth. ARPA is ARR per customer.
• Define the bucket once. Changing the definition between fundraises is how trust dies.

Further learning

SaaS Metrics 2.0 (David Skok)“If you cannot measure it, you cannot improve it” – Lord Kelvin This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business. It is a completely updat…For Entrepreneurs

Next: the ARR bridge.