What Is MRR and ARR? The Metrics Behind Every SaaS Report

The definitions

Monthly recurring revenue is the normalised monthly value of your subscriptions — what you would collect this month if nothing changed. Annual recurring revenue is the same figure over a year, usually MRR times twelve. Neither is an accounting measure and neither appears on a financial statement; they exist so a subscription business can compare periods without annual and monthly plans distorting the comparison.

Normalising correctly

The one rule that matters: spread a payment across the period it covers. A customer paying $1,200 up front for a year is $100 of MRR, not $1,200 in the month they paid. Getting this wrong produces a chart that spikes whenever an annual deal closes and looks like collapse the following month, which tells you nothing about the business. The same logic makes deferred revenue a real liability on the balance sheet: you have the cash and have not yet earned it.

What to exclude

Anything that will not recur. One-time setup fees, implementation and migration work, overage charges, hardware, professional services, and credits. The test is whether you can reasonably expect the same amount next month without doing anything. Including one-off revenue is the most common way MRR becomes a number that flatters and cannot be forecast from.

The components are the useful part

A single MRR figure tells you where you are. The breakdown tells you why it moved, and you cannot manage the metric without it. New MRR from customers acquired this period. Expansion from existing customers upgrading or adding seats. Contraction from downgrades. Churned MRR from cancellations. Net new MRR is the sum, and two businesses with identical net new can be in completely different health — one growing on new acquisition while leaking existing customers, the other flat on acquisition but expanding its base. The second is far more valuable and the headline number hides the difference.

How the numbers get inflated

Several practices are common and each makes the figure less useful. Counting signed contracts before service begins. Including trials, or free accounts, at their notional paid value. Booking a multi-year deal's full value as ARR in year one. Counting a usage spike as recurring when it plainly is not. None of these are necessarily dishonest — but each breaks the comparability that was the whole point, and any investor who has seen a few of these will normalise your numbers themselves.

The retention ratios that actually matter

Once you have the components, two ratios follow. Gross revenue retention counts only losses — churn and contraction, no expansion — so it caps at 100% and shows how leaky the base is. Net revenue retention includes expansion and can exceed 100%, meaning a cohort of existing customers is worth more this year than last. NRR above 110% is the strongest single signal in a subscription business, and reporting NRR without also showing GRR is how heavy churn gets hidden behind a few large upgrades.

Using them honestly

Pick one definition, write it down, apply it consistently, and report the components alongside the total. A slightly conservative number you can trust is more useful than a generous one you have to re-explain each quarter — and the discipline of deciding what counts usually surfaces something about the business you had not noticed.