Finance glossary
ARR & MRR — Definitions and Calculation for SaaS
In one sentence
L'ARR (Annual Recurring Revenue) and the MRR (Monthly Recurring Revenue) are the benchmark metrics for subscription model companies. They measure recurring revenue — predictable and regular — which constitutes the basis for valuing SaaS startups. Unlike traditional revenue, ARR and MRR provide a clear view of the growth trajectory and economic health of the recurring business model.
Full definition
MRR: monthly recurring income. Sum of all active subscriptions in a given month, normalised to a monthly basis. A customer paying €12,000/year contributes €1,000 to the MRR.
ARR: MRR × 12. Annualises recurring revenue to give a long-term vision.
Types of MRR: New MRR (new customers), Expansion MRR (upsell/cross-sell), Contraction MRR (downgrades), Churned MRR (terminations).
Net New MRR = New + Expansion − Contraction − Churned.
Calculation formula
MRR = Σ (Price of each active subscription / Period in months)
ARR = MRR × 12
Net MRR Growth = (MRR month N − MRR month N-1) / MRR month N-1 × 100
Why it matters
Predictability. Recurring income is predictable. ARR annualises current recurring revenue; it is not a guarantee of future turnover. Terminations, price variations and new contracts modify this trajectory.
Valuation. There is no universal ARR multiple: growth, margin, retention, revenue quality and market conditions require dated comparable evidence.
Measurement of traction. MRR which grows 10%/month = doubling time of 7 months.
Operational management. The decomposition of the MRR makes it possible to identify the growth levers.
Prepare financing without a universal MRR threshold
Present recurring revenue, its evolution and sources, using a stable MRR definition.
Connect traction to retention, margins, runway and financing needs.
Investor expectations depend on the business model, market, geography and period. No MRR amount guarantees a funding round.
Limits and pitfalls
ARR ≠ cash. Collections depend on the billing schedule, initial and final receivables and payments received. The DSO alone does not allow you to calculate the annual cash flow.
Annual discounts inflate the ARR. A customer who pays €10K/year for a service costing €12K/year contributes €833/month — but paid in one go.
Hidden Churn. The annual ARR hides the monthly churn. 5%/month = 46% annually.
Accounting for trials. Trials should not be counted as MRR.
ARR ≠ GAAP revenue. In accounting, an annual payment is recorded over 12 months (deferred income).
FAQ
ARR vs CA? CA includes all sources. ARR only counts recurring subscription revenue.
How to switch from MRR to ARR? ARR = MRR × 12.
Does the MRR include professional services? No, only recurring subscription revenue.
What is a good MRR growth rate? Assess cohort trends alongside retention, margin and cash consumption. A single rate is not enough to judge performance.
These metrics take on their meaning in a review of revenues, costs and cash. Discover the financial management of your SaaS startup with a part-time CFO.
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