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. Two businesses can both add £50k of net new MRR in a month: one on healthy new-customer acquisition, the other propping up heavy churn with a single big expansion deal. The total hides that. The movement shows it.

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.

Things people get wrong

• Reporting MRR with one-off charges folded in. Setup fees, professional services and overages that don’t recur aren’t recurring revenue, and including them inflates MRR and breaks every ratio built on it.
• Confusing bookings with MRR. A signed annual deal is bookings now and MRR spread across the term. Counting the full contract value as this month’s revenue overstates the run rate badly.
• Watching the net number only. Net new MRR can look flat while gross churn quietly climbs, masked by expansion. The components have to be read separately.
• Annualising a shaky MRR into ARR and treating it as committed. ARR is a run-rate projection, not money in the bank - it assumes nobody churns.