Framework
Term

ARR / MRR (Annual / Monthly Recurring Revenue)

Annual Recurring Revenue is the normalized yearly value of all active subscriptions; MRR is the same figure expressed monthly. Together they are the headline revenue metrics for any subscription business.

ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue) are the two ways subscription businesses summarize the run-rate revenue of their currently-active contracts. They exclude one-time fees, professional services, and any revenue that isn't expected to recur.

What's included

  • Active subscription contracts, at their committed contract value, annualized
  • Add-ons and seat expansions priced as part of the subscription
  • Excluded: setup fees, one-off implementation, usage-based overages (unless the overage itself is a recurring contractual commitment)

ARR vs MRR

The two are mathematically identical — ARR = MRR × 12. The choice of which to report is usually a function of company stage:

  • MRR for early-stage SaaS where deals are smaller and monthly changes are meaningful
  • ARR for mid-market and enterprise SaaS where annual contracts dominate and monthly variance is noise

Some companies report both; investors and boards typically standardize on ARR once a company is past $1M in revenue.

How ARR changes

Track ARR by its four components — the ARR walk:

  • New ARR: from new customers acquired this period
  • Expansion ARR: from existing customers upgrading
  • Contraction ARR: from existing customers downgrading
  • Churned ARR: from customers cancelling entirely

Net New ARR = New + Expansion − Contraction − Churn. A healthy subscription business has Net New ARR > 0 every quarter; a great one has Expansion alone > Contraction + Churn (the foundation of net revenue retention >100%).

Related

  • Unit Economics — what ARR has to support per customer
  • Churn — the rate at which ARR leaks
  • LTV — total expected ARR contribution per customer

See also

Nearby terms

All terms →
Activation

The point a new user has experienced enough of the product's core value that they're likely to return — usually defined by a specific in-product behavior.

Aha Moment

The specific point in a new user's experience when they first understand why the product matters to them — when intent converts to belief. Identifying and accelerating users to the Aha Moment is the core of activation-stage product work.

Blue Ocean

A market space where competition is irrelevant because the offering is uncontested — created by either redefining an industry's value proposition or by entering an entirely new market segment.

Burn Rate

The amount of cash a company spends per month in excess of what it earns. Gross burn is total monthly spend; net burn subtracts revenue collected. Burn rate is the rate at which runway depletes.