ARR and MRR are the two most important numbers in any SaaS business. If you're not calculating them correctly, you have no idea whether your business is actually growing.
This guide shows exactly how to calculate both metrics and avoid common pitfalls.
The Formulas
Monthly Recurring Revenue:
MRR = Sum of all active monthly subscriptions
Annual Recurring Revenue:
ARR = MRR × 12
Or:
ARR = Sum of all active annual contracts
Step-by-Step: Calculating MRR
Step 1: List all customers with active subscriptions As of the measurement date (usually month-end), list every customer still paying.
Step 2: Record each customer's monthly payment amount This is their subscription price, normalized to a monthly amount.
Step 3: Sum all monthly payments
MRR = Customer 1 + Customer 2 + ... + Customer N
Example: Manual MRR Calculation
As of March 31, 2026:
| Customer | Plan | Monthly Amount | Status | |----------|------|----------------|--------| | Acme Inc | Growth | $999 | Active | | TechStart | Starter | $299 | Active | | Global Corp | Enterprise | $4,999 | Active | | Small Biz | Starter | $299 | Paused (don't count) | | NewCo | Growth | $999 | Active | | OldCorp | - | - | Churned (don't count) |
MRR Calculation:
MRR = $999 + $299 + $4,999 + $999 = $7,296
(Don't count Small Biz because they're paused, don't count OldCorp because they churned.)
ARR:
ARR = $7,296 × 12 = $87,552
Handling Different Billing Cycles
Most SaaS companies have mixed billing (some monthly, some annual). Normalize to monthly:
| Customer | Billing | Amount | Frequency | Monthly MRR | |----------|---------|--------|-----------|------------| | Customer A | Monthly | $100 | Every month | $100 | | Customer B | Annual | $1,200 | Once per year | $1,200 ÷ 12 = $100 | | Customer C | Quarterly | $300 | 4x per year | $300 ÷ 3 = $100 |
All three customers contribute $100 to MRR even though they pay differently.
MRR Components (Breaking Down Growth)
Understanding what drives MRR changes is critical:
Starting MRR: $100,000 (March)
During April:
- New customer A: +$500
- New customer B: +$300
- Churn (lost $2,000): -$2,000
- Customer C upgrades ($200 → $500): +$300
- Customer D downgrades ($1,000 → $600): -$400
Ending MRR Components:
- Starting MRR: $100,000
- New MRR: +$800 (new customers)
- Churned MRR: -$2,000 (losses)
- Expansion MRR: +$300 (upgrades)
- Contraction MRR: -$400 (downgrades)
Net New MRR = $100,000 + $800 - $2,000 + $300 - $400 = $98,700
Or: Net New MRR = New MRR + Expansion - Churn - Contraction
Track each component separately; they tell different stories:
- Rising New MRR = sales are strong
- Rising Churned MRR = product problems
- Rising Expansion MRR = product-market fit improving
- Rising Contraction MRR = pricing/value issues
Net Revenue Retention (Expansion vs. Contraction)
Is your existing customer base growing or shrinking?
NRR = (Starting MRR - Churned MRR + Expansion MRR) ÷ Starting MRR
Example:
- Starting MRR: $100,000
- Churned MRR: $8,000
- Expansion MRR: $10,000
NRR = ($100,000 - $8,000 + $10,000) ÷ $100,000 = 102%
NRR > 100% = expansion exceeds churn (excellent). Your existing customer base grew by 2%.
This is the most important metric for SaaS; >100% NRR is what separates exceptional companies from average ones.
ARR Calculations at Scale
Once you have MRR, ARR is just MRR × 12. But at scale, calculate it directly to verify:
Method 1 (from MRR):
ARR = Current MRR × 12
Method 2 (direct from contracts):
ARR = Sum of all annual contract values
For customer on $100/month ($1,200/year annual equivalent):
- If on monthly billing: ARR = $1,200
- If on annual billing: ARR = annual contract amount = $1,200
- Both should match
Example with mixed billing:
- 50 customers on $99/month ($1,188 annual): $59,400
- 20 customers on $1,200/year: $24,000
- 5 customers on $5,000/quarter ($20,000 annual): $100,000
- Total ARR = $183,400
Or: MRR = $183,400 ÷ 12 = $15,283
Annual Contract Value (ACV) vs. ARR
Don't confuse these:
ACV = Average value per customer annually
ACV = ARR ÷ Number of Customers
ARR = Total company recurring revenue
Example:
- ARR: $1,000,000
- Customers: 100
- ACV: $10,000
ACV is useful for comparing sales efficiency (lower ACV = easier to sell, but need more customers).
MRR Waterfall: Visualizing Growth
Waterfall charts show how MRR moved month-to-month:
Starting MRR (March): $100,000
+ New MRR: +$5,000
- Churned MRR: -$8,000
+ Expansion MRR: +$3,000
- Contraction MRR: -$1,000
= Ending MRR (April): $99,000
This visual shows: you lost customers despite adding new ones and expanding existing. Time to fix churn or improve expansion.
Common Mistakes
Mistake 1: Including one-time revenue Setup fees, professional services, and consulting are not recurring. Only count subscription revenue.
Mistake 2: Double-counting annual customers A customer on an annual plan for $12,000 contributes $12,000 to ARR, not $1,000/month × 12 months = $12,000 separate from ARR. Count once.
Mistake 3: Counting free trials Free trials are $0 MRR until they convert to paid plans.
Mistake 4: Not accounting for contract dates correctly Customer signs on March 1 for $1,000/month: full $1,000 counts toward March MRR. Customer cancels mid-month: still count their full month's value (or use the day they cancelled; just be consistent).
Mistake 5: Ignoring net revenue retention (NRR) MRR alone doesn't tell you if the business is healthy. A company with $1M MRR and 50% NRR is declining. $1M MRR with 120% NRR is thriving.
Forecasting ARR
Use your MRR trend to forecast:
Scenario 1 (Conservative):
- Current MRR: $100,000
- Expected monthly growth: 5%
- Month 1: $105,000
- Month 2: $110,250
- Month 3: $115,763
- Projected 3-month ARR: $115,763 × 12 = $1,389,156
Scenario 2 (Aggressive):
- Current MRR: $100,000
- Expected monthly growth: 10%
- Month 1: $110,000
- Month 2: $121,000
- Month 3: $133,100
- Projected 3-month ARR: $133,100 × 12 = $1,597,200
Most investors expect to see your "run-rate ARR" (MRR × 12) grow month-over-month.
Tools
Spreadsheet: Works well for <500 customers. Monthly update. Subscription platforms: Stripe, Chargebee, Zuora calculate MRR/ARR automatically. Metrics dashboards: Looker, Tableau, Amplitude show MRR trends and components. Finance tools: Sage Intacct, NetSuite integrate with subscription billing.
Related Articles
- What Is Annual Recurring Revenue — Strategy and importance
- How to Calculate Churn Rate — Impacts MRR growth
- How to Calculate Net Revenue Retention — NRR >100% is the goal