Software Growth

MRR (Monthly recurring revenue)

MRR is the predictable revenue your subscriptions produce each month, with annual and quarterly plans converted to a monthly amount and one-time fees left out.

MRR is the number most subscription founders check first each morning. It tells you how much recurring revenue your product is producing right now, on a monthly basis. Unlike cash in the bank or accounting revenue, it is not distorted by who paid annually or when an invoice happened to land.

Baremetrics describes it as all of your recurring revenue normalized into a monthly amount, and stresses it is an operating metric, not an accounting figure. That distinction matters later.

How to calculate MRR

Convert every active paying subscription to its monthly equivalent, then add them up.

Say you have 100 customers on a $29 monthly plan and 20 customers on a $348 annual plan. The monthly customers add $2,900. Each annual customer is $348 / 12 = $29 per month, so those add $580. Your MRR is $3,480.

The shortcut version is customers multiplied by average revenue per account, but summing real subscriptions is more accurate once your plans differ.

The five MRR movements

MRR changes for five reasons. ChartMogul's documentation uses the same categories, and David Skok recommends tracking the components separately rather than watching only the total.

  • New MRR: a first-time customer starts paying. See new MRR.
  • Expansion MRR: an existing customer pays more through upgrades, seats or add-ons. See expansion MRR.
  • Contraction MRR: an existing customer pays less but stays. See contraction MRR.
  • Churned MRR: a customer cancels their last subscription. See churned MRR.
  • Reactivation MRR: a past customer comes back. See reactivation MRR.

Here is a month for a product that starts at $20,000 MRR: $2,400 new, $900 expansion, $300 contraction, $1,000 churned and $200 reactivation. Ending MRR is 20,000 + 2,400 + 900 - 300 - 1,000 + 200 = $22,200. The net change, $2,200, is your net new MRR.

What not to count

  • One-time fees. Setup, onboarding, migration and consulting are not recurring. Baremetrics excludes them.
  • Annual payments left unnormalized. A $1,200 annual payment is $100 of MRR, not $1,200 in the month it arrives. Counting the full amount makes MRR spike in renewal months and look like growth.
  • Trials and free users. Only paying customers count. A trial that has not converted is a lead.
  • Discounts you have not netted out. Use what the customer actually pays after coupons.
  • Usage overages that swing wildly. Decide on a rule, such as a trailing average, and apply it every month.

MRR is not revenue

MRR is a run rate. Accounting revenue is recognized as service is delivered (see revenue recognition), so the two can differ in any given month, especially with refunds, proration or annual prepay. Use MRR to steer the business and your accountant's numbers for taxes and reporting.

Where it matters for a small SaaS

Rob Walling treats MRR and its month-over-month growth as the primary numbers to watch, and says absolute dollars added matter most for bootstrapped founders (Startups for the Rest of Us, episode 620). Under about $1M in recurring revenue, MRR is also the better working number than ARR because it reacts to a month of good or bad work instead of hiding it inside a yearly figure.

Pick one definition, write it down, and keep it stable. A metric you quietly redefine every quarter is worse than a slightly imperfect one you apply consistently.

Sources

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