Understanding recurring revenue metrics for subscription-based businesses
MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) are the lifeblood metrics of subscription-based businesses, particularly SaaS companies. They measure predictable, recurring revenue streams.
Unlike one-time sales, recurring revenue provides visibility into future income, making these metrics critical for assessing business health, growth, and valuation.
MRR = Total Monthly Subscription Revenue
ARR = MRR × 12
These metrics normalize all your subscriptions to a common time period, making it easy to track growth and predict future revenue.
To understand MRR growth, break it down into these components
Revenue from brand new customers
Increases MRR
Additional revenue from existing customers
Increases MRR
Revenue lost from downgrades
Decreases MRR
Revenue lost from cancellations
Decreases MRR
Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churned MRR
This is the actual growth (or decline) in your MRR from one month to the next. Positive net new MRR means you're growing!
Calculate your MRR movements and annual recurring revenue
This is a hypothetical, illustrative example for teaching purposes, not an actual case study.
Let's walk through a month in the life of "Acme Cloud Monitor," a monitoring-as-a-service platform for cloud infrastructure.
| Component | Details | Amount |
|---|---|---|
| Starting MRR | Beginning of January | $50,000 |
| New MRR | 15 new customers × $200/mo | +$3,000 |
| Expansion MRR | 8 customers upgraded to Enterprise | +$1,600 |
| Contraction MRR | 3 customers downgraded | -$450 |
| Churned MRR | 4 customers cancelled | -$800 |
| Net New MRR | $3,000 + $1,600 - $450 - $800 | +$3,350 |
| Ending MRR | End of January | $53,350 |
| Annual Run Rate (ARR) | $53,350 × 12 | $640,200 |
These derived metrics help assess the health of your recurring revenue business
Formula: (Net New MRR ÷ Starting MRR) × 100
What it means: How fast is your recurring revenue growing month-over-month?
Good target: 5-10% for established SaaS, 15-20%+ for early stage
Formula: (Churned MRR ÷ Starting MRR) × 100
What it means: What percentage of revenue you're losing each month
Good target: < 2% for B2B SaaS, < 5% for B2C
Formula: [(Starting MRR + Expansion - Contraction - Churn) ÷ Starting MRR] × 100
What it means: Are existing customers growing or shrinking in value?
Good target: > 100% means expansion exceeds churn (excellent!)
Formula: ARPU ÷ Churn Rate
What it means: How much revenue you'll earn from an average customer before they churn
Example: $200 ARPU ÷ 2% churn = $10,000 LTV
(This simplified version omits gross margin — see ltv.html for the fuller LTV = ARPA × Gross Margin % ÷ Churn Rate formula used elsewhere on this site.)
Formula: Customer Lifetime Value ÷ Customer Acquisition Cost
What it means: Return on your sales & marketing investment
Good target: 3:1 or higher (earn $3+ for every $1 spent acquiring)
Formula: Customer Acquisition Cost ÷ Average MRR per Customer
What it means: How long before a customer becomes profitable?
Good target: < 12 months (faster payback is better)
Imagine you're a senior cloud engineer at a SaaS company. The CFO shares in the all-hands that:
"Our MRR is $500K with a 5% monthly growth rate. However, our cloud costs are growing at 8% per month. At ARR of $6M, our infrastructure costs are 30% of revenue—well above our target of 20%."
What you now understand:
You can now: Propose specific optimization initiatives with clear ROI, prioritize work that protects gross margin, and communicate in business terms that resonate with finance and executive teams.
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