MRR vs ARR: how to calculate and use each SaaS metric

MRR vs ARR comes down to time frame: monthly recurring revenue (MRR) is the predictable subscription revenue you earn in a month, and annual recurring revenue (ARR) is the same thing expressed per year, usually MRR × 12. MRR is better for tracking month-to-month momentum in smaller or fast-changing businesses, while ARR is the headline figure for businesses built mainly on annual contracts.

Both metrics are only useful if you calculate them consistently. This guide covers the formulas, the common mistakes and how to break MRR down so it tells you what is actually happening.

What counts as recurring revenue

Recurring revenue is the portion of your revenue that repeats on a contract or subscription basis. For MRR and ARR, include:

• Subscription fees for active, paying customers
• Recurring add-ons and per-seat charges
• Discounts that reduce the recurring amount (use the discounted figure)

Exclude:

• Once-off set-up, onboarding or implementation fees
• Usage or overage charges that vary unpredictably (track these separately)
• Customers in a free trial
• Refunds of past periods (these affect revenue, not the recurring run-rate)
• VAT, which you collect on behalf of SARS and is not your revenue

That last point is easy to miss in South Africa. If your plan is R575.00 per month including 15% VAT, the MRR contribution is R500.00.

MRR vs ARR: the formulas

MRR = sum of the normalised monthly recurring amount for every active paying subscription.

ARR = MRR × 12, or, for contract-led businesses, the sum of annual contract values currently in force.

"Normalised" means converting every subscription to a monthly amount:

An annual plan paid upfront does not put R5,400.00 into this month's MRR. It contributes R450.00 each month for the year. Cash and MRR are different things, and mixing them up is the most common MRR mistake.

Worked example

A company has these active subscriptions at the end of August (all amounts excluding VAT):

• 120 customers on a monthly plan at R500.00: R60,000.00
• 30 customers on an annual plan at R5,400.00: 30 × R450.00 = R13,500.00
• 10 customers on a monthly plan at R500.00 with a 20% discount: 10 × R400.00 = R4,000.00

MRR = R60,000.00 + R13,500.00 + R4,000.00 = R77,500.00

ARR = R77,500.00 × 12 = R930,000.00

Breaking MRR into components

A single MRR number hides the story. Split the change in MRR each month into:

• New MRR: from customers who started paying this month
• Expansion MRR: upgrades, extra seats and add-ons from existing customers
• Contraction MRR: downgrades and removed seats
• Churned MRR: from customers who cancelled or were cancelled for non-payment
• Reactivation MRR: from previously churned customers who returned

Then:

Ending MRR = Starting MRR + New + Expansion + Reactivation − Contraction − Churned

Example MRR movement

Net new MRR is R4,500.00. But notice that churned MRR of R3,500.00 cancels out more than half of new MRR. That is where to look next. Our guide on how to calculate churn rate shows how to turn these figures into customer and revenue churn percentages.

When to use MRR and when to use ARR

Many businesses report both: ARR as the headline, MRR and its components as the operating dashboard.

Common mistakes

1. Counting annual prepayments as one month's MRR. Spread them over 12 months.
2. Including VAT. Report MRR excluding VAT.
3. Including trials. A trial is not revenue until it converts.
4. Ignoring past-due subscriptions. Decide a rule, for example exclude subscriptions that are more than 30 days past due, and stick to it. A strong dunning management process keeps this number small.
5. Mixing currencies without a fixed rate. If you bill in rands and other currencies, convert at a consistent rate for reporting.
6. Treating MRR as accounting revenue. MRR is a management metric. Your financial statements follow accounting standards and your accountant's revenue recognition rules.

Related metrics worth tracking

• ARPA (average revenue per account): MRR ÷ number of paying customers. In the example above, R77,500.00 ÷ 160 = R484.38.
• Net revenue retention: how much MRR from a starting group of customers remains after a period, including expansion.
• Customer lifetime value: a rough estimate is ARPA ÷ monthly revenue churn rate, although it is sensitive to assumptions.

How CentraPoint helps

CentraPoint includes standard reports and a report builder, so you can build views of active subscriptions, plans and collections, save them, schedule them for email delivery and export to CSV or XLSX. Because subscriptions, invoices and payments sit in one system, and VAT is recorded separately on each invoice, it is easier to calculate MRR from clean data. Invoices and payments can also sync to Sage, Xero, QuickBooks or Zoho Books for your accounting records. See the features page for details.

Frequently asked questions

What is the difference between MRR and ARR?

MRR is recurring subscription revenue normalised to one month; ARR is the same figure normalised to a year, usually MRR × 12. They measure the same thing on different time scales.

Should VAT be included in MRR?

No. VAT is collected on behalf of SARS, so MRR should be calculated on amounts excluding VAT. A R575.00 VAT-inclusive monthly plan contributes R500.00 to MRR at 15% VAT.

How do annual plans affect MRR?

Divide the annual price by 12 and include that amount in MRR every month of the contract. A R5,400.00 annual plan adds R450.00 to MRR, not R5,400.00 in the month it was paid.

Do one-off set-up fees count towards ARR?

No. Set-up, implementation and other once-off fees are not recurring, so they are excluded from both MRR and ARR and tracked as separate revenue.