ARR vs MRR: Navigating the complexities of SaaS revenue tracking

Jonah Remz
Jonah Remz
Head of Finance
Posted on
July 11, 2023
min read
ARR vs MRR: Navigating the complexities of SaaS revenue tracking

SaaS revenue tracking, or the process of monitoring and analyzing the revenue generated by your SaaS business, is the most straightforward way of determining your company’s overall performance. 

Because SaaS businesses typically rely on a recurring revenue model, two of the most important metrics for revenue tracking are ARR (annual recurring revenue) and MRR (monthly recurring revenue). While these metrics may sound like two different ways of displaying the same information, they each tell a slightly different story about your business and are best used in different contexts. 

Keep reading to learn how ARR. vs. MRR differ, how to calculate each one, and what kind of insights each provides about your business’s financial health, customer retention, and overall business performance.

But first—what is recurring revenue?

Recurring revenue is the revenue that a company generates on a regular and predictable basis, typically through subscription contracts. This can be contrasted to one-time or transactional revenue, which comes from sporadic and unpredictable sources like one-time add-ons or usage-based revenue. 

For SaaS businesses that sell their product with subscription contracts, recurring revenue makes up the bulk of their revenue. 

Why is recurring revenue important for SaaS revenue tracking?

Tracking recurring revenue provides a reliable measure of your company’s financial performance and serves as a starting point for analyzing the success of your offerings, pricing strategies, customer retention efforts, and other initiatives. It helps in identifying areas of improvement and optimizing business operations. 

It can also help you forecast cash flow and predict future performance, which can help you make data-driven decisions about investing in growth initiatives, managing expenses, and optimizing resource allocation.

Finally, tracking recurring revenue is also a huge component of understanding your business’s valuation and attracting investors. Investors often rely on metrics like ARR and MRR (but usually ARR) to assess the financial health, growth potential, and sustainability of a business. By accurately tracking your recurring revenue, you can present a compelling case to investors and increase your chances of accessing growth capital.

MRR vs ARR: the basics

In the realm of SaaS revenue tracking, two key metrics come into play: monthly recurring revenue (MRR) and annual recurring revenue (ARR). While both metrics help you track recurring revenue and should be monitored, they are applicable in different scenarios. 

Here is a brief summary of how the two compare: 

  • MRR, or monthly recurring revenue, represents the total revenue generated on a monthly basis from subscription contracts. MRR provides insights into the revenue generated in the short term, allowing businesses to track monthly trends, assess the impact of recent changes, and closely monitor fluctuations.
  • ARR, or annual recurring revenue, reflects the total revenue generated from subscription contracts over a year. ARR provides a broader view of the revenue generated by a SaaS company, smooths out short-term fluctuations, and offers a more comprehensive understanding of performance and revenue trends. It is often utilized for long-term forecasting, budgeting, and assessing the sustainability of the business.

Here’s a more detailed look on how ARR vs. MRR differ in terms of calculation, benefits, limitations, and use cases.

What is annual recurring revenue? 

Annual recurring revenue, or ARR, measures the amount of predictable, recurring revenue your company generates over a 12-month period. ARR is significant for SaaS revenue tracking as it provides a big-picture, comprehensive view of the company's revenue stream and serves as an important indicator of business performance and growth potential.

How to calculate ARR

You can calculate your ARR with the following formula. Note that all numbers in this formula should be taken from the same 12-month period.

ARR = (Subscription revenue + other recurring revenue from add-ons and upgrades) - revenue lost from cancellations and downgrades
ARR = (Subscription revenue + other recurring revenue from add-ons and upgrades) - revenue lost from cancellations and downgrades

 It is important to note that non-recurring revenue, such as one-time charges, should be excluded from this calculation. ARR specifically focuses on the revenue that could reasonably be expected to repeat in subsequent years.

ARR can also measure the revenue across your entire business, or it could be broken down into more specific segments to gain insight into the success of specific initiatives. For instance, you could measure the ARR derived from a particular product, or the ARR attributed to a specific marketing campaign.

What are the benefits and limitations of ARR?

Although it’s good practice to track ARR, it’s not always the best metric for each situation. Here are some of the benefits and limitations of using ARR over MRR.

ARR benefits

  • Provides a holistic view of revenue performance. ARR allows you to get a more holistic, comprehensive view of your business’s performance by smoothing out short-term fluctuations and only considering aggregate revenue over an annual period. This can help eliminate the noise caused by monthly variations and enable your business to better forecast future revenue, plan strategically, and assess the long-term sustainability of your operations. 
  • Simplified reporting and analytic processes. Because ARR aggregates revenue data over a longer period than MRR, ARR reduces the complexity associated with tracking monthly fluctuations. This allows for a more streamlined and less time-consuming process of financial analysis, benchmarking, and communicating performance to stakeholders. The simplicity of ARR reporting enhances transparency within the organization and provides a clearer representation of revenue performance.
  • Great for investors. ARR is the preferred metric for investors when analyzing your business’s performance, possibly because of how clear, straightforward, and simple it is. The fact that it measures growth and success over a long period of time is likely also a factor. 

ARR limitations

  • Reduced granularity. ARR's focus on aggregating annual performance can obscure valuable insights into monthly revenue trends. This can hinder your ability to identify short-term or smaller-scale issues that are hidden in the weeds of your monthly fluctuations, such as the success of a product launch or a new sales process. 
  • Delayed visibility into performance. Unlike MRR which reflects revenue changes in real-time, ARR can only measure changes that occur on a long-term year-to-year basis. This delay can pose a challenge if you need to respond swiftly to a market shift or evolving customer need, or if you need to troubleshoot the performance of a recent initiative. Companies that rely solely on ARR may experience slower detection of revenue pattern shifts, which can reduce their ability to assess the immediate effect of new changes or make timely adjustments. 

The bottom line: Who ARR is best for

ARR provides a comprehensive view of recurring revenue over an extended period and helps companies understand their big-picture financial health. Because of this, ARR is well-suited for predicting long-term growth and changes, forecasting future performance, and facilitating budgeting for significant expenses and strategic planning.

ARR is best suited for companies that sell in annual or multi-year contracts since their business model already works on an annual basis. For this reason, enterprise companies usually prefer it, since they typically sell in larger, longer-term contracts. It is also beneficial for companies that experience significant seasonal variations, have complex subscription models, or otherwise experience too many short-term variables to get good insight into their overall performance by tracking revenue on a monthly basis. 

Finally, ARR is useful for appealing to investors and determining your company’s valuation, as it is seen as a fundamental indicator of your company's revenue potential and long-term sustainability. 

What is monthly recurring revenue (MRR)?

Monthly recurring revenue, or MRR (MRR) measures the recurring, predictable revenue your SaaS business generated over a 1-month period. MRR is an important measure of SaaS revenue because it provides a detailed snapshot of how your revenue has fluctuated over a short period of time. It is useful for tracking revenue growth, analyzing trends, and measuring the impact of short-term initiatives. 

How to calculate MRR

You can calculate your MRR with the following formula.

MRR = Number of monthly subscribers x Average revenue per user (ARPU) 
MRR = Number of monthly subscribers x Average revenue per user (ARPU) 

For businesses that exclusively offer annual contracts, you can do:

MRR = Number of annual users x ARPU per year / 12  
MRR = Number of annual users x ARPU per year / 12  

Or, if you offer a mix of both, combine the two formulas. 

MRR = [Number of monthly subscribers x Average revenue per user (ARPU) ] + [ Number of annual users x ARPU per year / 12 ]‍
MRR = [Number of monthly subscribers x Average revenue per user (ARPU) ] + [ Number of annual users x ARPU per year / 12 ]

Like ARR, MRR calculations should not include one-time charges and other forms of non-recurring revenue. It can also be broken down into segments, like MRR per specific product or user type, or MRR derived from a certain initiative. 

What are the benefits and limitations of MRR?

MRR should always be tracked in some capacity, especially for companies that sell in monthly contracts. However, it’s not always the best metric to rely on. Here are the benefits and limitations of tracking MRR over ARR.

MRR Benefits

  • Provides real-time insights. MRR can help you understand how your revenue reacts to short-term decisions or market fluctuations, such as the launch of a new marketing campaign or a sudden market-wide dip due to a news event. It’s also useful for assessing market trends as they’re underway, so you can address them in an agile manner. 
  • Increased granularity. By tracking your monthly changes in revenue and how they fluctuate depending on market conditions, seasonality patterns, and the impact of specific events or initiatives, you can get a more granular view of how exactly your business is affected by various events and decisions. This is especially useful if you segment your MRR into buckets based on product, audience, or initiative. 
  • Allows for quick decision-making. Due to both the detailed and short-term nature of MRR, MRR allows for much more agile decision-making. After just 1 month, you can start tracking MRR changes to assess the effectiveness of various strategies such as pricing adjustments, product updates, marketing campaigns, and retention efforts. This ability to quickly analyze trends based on MRR can allow you to iterate and adjust your strategies so you can stop anything that isn’t working before it does too much damage, and optimize what is working to quickly maximize its positive effect.

Limitations of MRR

  • Subject to short-term fluctuations. While the short-term and detailed nature of MRR can be useful, it can also be misleading. When short-term changes lead to unusual clusters of increased or decreased monthly revenue, it can distort your view of your business’s performance. Because of this, it’s important to be careful with MRR and to understand how short-term fluctuations fit within the larger patterns of your business’s performance. 
  • Provides incomplete insights on long-term performance. Although MRR offers detailed insights into your monthly revenue, it does not provide a complete view of the overall revenue performance over a longer period. Focusing exclusively on MRR can limit your ability to accurately forecast future revenue, plan long-term strategies, and communicate the financial health of the business to investors or stakeholders. To gain a comprehensive understanding of the business's financial performance, it is essential to consider other metrics that measure success over longer time periods, such as ARR. 

The bottom line: Who MRR is best for

MRR can provide detailed, real-time insight into short-term fluctuations in revenue. Because of its speed and granularity, it is valuable for short-term planning and measuring the impact of recent changes. It is also particularly useful for businesses that operate on a monthly subscription model. 

By tracking MRR, businesses can assess the effectiveness of short-term changes like pricing adjustments, product updates, marketing campaigns, and customer retention strategies in a relatively short timeframe. MRR can also help SaaS businesses track how market trends, news events, seasonal fluctuations, or competitor performance affects their revenue. MRR enables businesses to make data-driven decisions and iterate on their strategies quickly. 

However, MRR isn’t as useful for tracking long-term trends or forecasting long-term growth. It also isn’t the preferred metric for determining your business’s valuation or overall performance and revenue potential, especially when dealing with investors. 

How to measure ARR vs. MRR effectively

Whether you’re tracking ARR or MRR (or, preferably, both), having a consistent, reliable, and accurate system for SaaS revenue tracking is key. Here are some tips for tracking your recurring revenue. 

1. Have a documented SaaS revenue tracking methodology

It’s very likely that multiple people will touch your revenue tracking, so take some time to ensure everyone who works on it is following the same rules. 

Have guidelines for what does and doesn’t count as recurring revenue, with consideration for gray areas that may be unique to your company. For example, you may need to create a protocol for categorizing a customer with usage-based pricing who has roughly the same rate of usage every month.

Having a protocol for what tools to use when analyzing data, how to report the data, and how to present the data will also be incredibly useful for maintaining accuracy and consistency as your company scales.

2. Identify and use supporting metrics 

Supporting metrics can greatly enhance the accuracy and insight of your revenue analysis when tracking and reporting on ARR and MRR. Some metrics that can help flesh out your understanding of your recurring revenue, and by extension, your business’s financial performance, include:

  • Churn rate: the percentage of customers who cancel within a specified period.
  • Customer lifetime value (CLTV or just LTV): the average revenue a customer generates throughout their entire relationship with your business.
  • Expansion revenue: the additional revenue generated from existing customers through up-selling, cross-selling, or expanding their product usage.
  • Gross MRR churn: The monthly revenue lost due to customer cancellations without accounting for any upsells or expansions. 
  • Net MRR retention: The revenue retained from existing customers, considering both churn and expansion. 

3. Set and monitor key performance indicators (KPIs)

Setting KPIs is useful in any area of business, but it’s especially important for SaaS revenue tracking. Monitor your recurring revenue and supporting metrics and decide what numbers should act as indicators of growth, stability, and decline.

These numbers should include both ARR and MRR targets, as well as targets for more specific metrics, like churn rate or LTV. Using your KPIs as an anchor point, you should continually monitor your recurring revenue and work on identifying trends, patterns, and potential areas of improvement.

By conducting thorough analyses of how your performance compares to your KPIs, your business can uncover opportunities for revenue optimization, identify underperforming segments, and make data-driven decisions to enhance customer acquisition and retention strategies.

Access your full ARR upfront with Capchase Pay

Both ARR and MRR play unique roles in understanding your business’s financial performance, and it’s important to understand where each metric is most useful. However, tracking and analyzing performance is only half the battle: you also have to figure out how to solve the problems you’ve found and maximize your business’s revenue potential. 

If you want to increase your ARR and access more of it upfront so you can improve cash flow and extend runway, consider Capchase Pay.

Capchase Pay is a B2B BNPL solution that allows you to access the full value of each contract upfront, while your customer gets to pay in comfortable short-term installments. This means that you can unlock capital tied up in long-term contracts and reinvest it in growth initiatives, without diluting equity or taking on additional debt.

To learn more about how you can leverage Capchase Pay to increase your ARR, access more cash, and accelerate your sales cycle, book a call with our team.