ARR & MRR — Definitions and Calculation for SaaS

Full definition

MRR : monthly recurring income. Sum of all active subscriptions in a given month, normalized to a monthly basis. A customer paying €12,000/year contributes €1,000 to the MRR.

ARR : MRR × 12. Annualizes 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 annualizes current recurring revenue; it is not a guarantee of future turnover. Terminations, price variations and new contracts modify this trajectory.

Valuation basis. SaaS growing > 100%: valuation 10-20x ARR. Mature SaaS: 5-8x.

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.

ARR benchmarks and thresholds per lift

Pre-seed : prototype, no significant MRR yet.

Seed : €10-50K MRR (€120-600K ARR).

Series A : €50-200K MRR (€600K-€2.4M ARR).

Series B : €200-500K MRR (€2.4-6M ARR).

Series C+ : > €500K MRR (> €6M ARR).

ARR YoY Growth : > 100% early, 50-100% growth, 30-50% scale-up.

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? For an early stage B2B SaaS, 10-15%/month is excellent.