Monthly and Annual Recurring Revenue (MRR, ARR)

What MRR and ARR actually means

MRR and ARR count only revenue the company can reasonably expect to recur. The headline figure matters far less than its composition. Net new MRR breaks into four movements: new customers, expansion from existing ones, contraction from downgrades, and churn from cancellations. Two companies can post identical net new MRR while one grows from expansion and the other runs hard just to replace what it lost.

Worked example

A company starts the month at 500,000 dollars MRR. It adds 40,000 from new customers and 15,000 from upgrades, then loses 8,000 to downgrades and 22,000 to cancellations. Net new MRR is 25,000 and closing MRR is 525,000. The headline is 5 percent growth. The story is that churn and contraction consumed more than half of everything won.

Why the board cares

Boards read the MRR waterfall, not the MRR total. Growth driven by expansion signals product-market fit and pricing power. The same growth driven entirely by new logos while churn runs hot signals a leaky bucket that gets more expensive to fill every quarter.

Common mistakes

• Including one-time or services revenue in MRR, which makes the recurring base look larger than it is.
• Reporting only net new MRR without the four-part waterfall, hiding whether the growth is durable.
• Annualizing a single strong month into ARR, which presents a spike as a run rate.

Related terms

• Average Revenue Per User (ARPU)
• Annual Contract Value (ACV)
• Net Revenue Retention (NRR)
• Churn Rate

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