Monthly recurring revenue (MRR) is the predictable total revenue generated monthly from active subscriptions. MRR measures a business’s financial health and predicts future earnings.
How to Calculate MRR
To calculate MRR, multiply the number of monthly subscribers by the average revenue per user (ARPU). For example, 5 subscribers paying $300 per month makes MRR $1,500.
MRR includes recurring charges like discounts and add-ons but excludes one-time fees. It reflects stable revenue that can be counted on at regular intervals. However, MRR is not guaranteed to last indefinitely, as downgrades or cancellations can reduce it, while new subscriptions or upgrades can increase it. A negative MRR indicates that lost revenue outweighs gains.
Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) represents the expected yearly revenue a software-as-a-service (SaaS) company might earn from its subscription-based services. It’s calculated by taking the subscription revenue from the most recent month or quarter and multiplying by 12 or 4, respectively.
Comparing MRR and ARR highlights the difference between short-term and long-term revenue perspectives. MRR is a particularly meaningful key performance indicator (KPI) when assessing the growth profile and financial health of SaaS and other subscription-based businesses.
Recurring revenue is the income businesses generate through regular subscriptions or memberships, billed on a periodic basis, such as weekly, monthly, or annually. This type of income is generated from an ongoing sale of products and services originating from a one-time sales decision.
Recurring revenue is more appealing to investors than one-time sales because it provides a sustainable and predictable income source. As transaction volume increases, businesses may need technology solutions to efficiently handle the volume of recurring payments.
Acquiring customers within a recurring revenue model incurs significant costs, and companies often undergo several billing periods before recovering the cost of customer acquisition. If customers terminate their subscriptions too early, losses may occur. In contrast, one-time payments, although simpler to manage, also carry the risk of loss. Recurring revenue models, by ensuring repeat purchases, enable businesses to forecast future income with greater accuracy.