MRR and ARR

Monthly recurring revenue (MRR) is the predictable subscription revenue a SaaS business earns each month, normalised to a monthly figure. Annual recurring revenue (ARR) is the same thing times twelve, and tends to be the unit for businesses selling annual contracts where a monthly framing would be artificial. They’re the base vocabulary of SaaS, and the reason they exist at all is the thing that makes SaaS different from one-off commerce: revenue is recurring and recognised over the life of the subscription, not booked in full at the point of sale.

That distinction trips people coming from eCommerce. A £12,000 annual contract signed today is £12,000 of bookings, but it’s £1,000 of MRR, and it’s recognised as revenue across the twelve months it covers. Three numbers, three meanings, and conflating them is how SaaS dashboards end up lying.

The MRR movement is the useful part

A single MRR number tells you the size of the business. What it’s doing is told by how MRR moved between two points, broken into five components:

New MRR - from newly acquired customers.
Expansion MRR - existing customers paying more, through upgrades, seat growth or usage.
Contraction MRR - existing customers paying less, through downgrades.
Churned MRR - revenue lost to cancellations.
Reactivation MRR - previously churned customers returning.

Net new MRR is new plus expansion plus reactivation, minus contraction, minus churned. This decomposition - the MRR movement, sometimes the MRR bridge - is what turns a vanity total into a diagnostic.

	Business A	Business B
New	£14,000	£3,000
Expansion	£9,000	£30,000
Reactivation	£1,500	£500
Contraction	-£4,500	-£8,000
Churned	-£11,000	-£16,500
Net new MRR	£9,000	£9,000

Same headline. A is acquiring well and losing a manageable amount. B has almost stopped acquiring, is losing half again as much revenue to churn, and is covering the entire gap with expansion - quite possibly one large account upgrading once.

A grows next month by doing the same things. B grows next month only if another big expansion lands, and gets found out the moment one doesn’t.

Why this is a CRO lens, not just finance

Each component maps to a different growth lever, so the movement tells you where to point effort:

Weak new MRR is an acquisition and top-of-funnel problem.
Weak expansion points at the value metric and the in-product upgrade paths.
High churn and contraction is a retention and activation problem, upstream of anything the marketing site can fix.

Net revenue retention is just this movement expressed as a ratio - expansion, contraction and churn measured against the starting base. MRR movement is the absolute version, NRR the percentage. Same story told two ways, and a SaaS lifetime value model is built on top of both.

Keeping the number honest

Two contaminations to watch for, both of which inflate the figure that every other SaaS ratio is calculated from.

Setup fees, professional services and one-off overages are revenue, and they are not recurring revenue. Folding them into MRR overstates the base and quietly breaks LTV, NRR and payback calculations downstream, because those all assume the number repeats next month.

And ARR is a run-rate projection rather than committed money. Annualising a month’s MRR asserts that nobody churns for the next twelve months, which is a forecast wearing the costume of a fact. That’s fine as shorthand between people who know it’s shorthand, and misleading the moment it reaches a board pack or a fundraising deck without the assumption attached.