ARR vs MRR: the difference, the formulas and which one to report

MRR and ARR describe the same stream of recurring revenue at two scales, and most arguments about them are really arguments about definitions. This page sets the two side by side, shows the arithmetic on one example company, and explains why neither number is the revenue line in an income statement. It belongs to SaaS metrics, and the ratio built on both, net revenue retention, has its own page.

Key differences between ARR and MRR

The two metrics count the same predictable, repeatable revenue, and they answer different questions⁷. MRR shows monthly momentum, while ARR shows annualized scale⁹.

Maxio’s description of the pair is the shortest one: ARR is 12 × MRR⁸. The rest of this page is about the exceptions.

What is Monthly Recurring Revenue (MRR)?

MRR is the normalized, predictable revenue a subscription business expects each month from active customers, excluding one-time fees². The formula takes the amount paid for a subscription and divides it by the number of months in its billing interval². A customer who pays for a full year is split across the 12 months and added to MRR a month at a time². Recording an annual contract at its full value instead is the common mistake².

ChartMogul’s example shows each rule at work. Customer B pays $10 a month and also paid a one-time $100 setup fee, which stays out². Customer C paid $60 in January for the whole year, which counts as $5 a month (our division: $60 ÷ 12)². The sum is (10 + 10 + (60/12) + 8 + 15) = $48².

Mercury’s version scales the same logic: 50 customers at $100 and 10 customers at $500 give (50 x $100) + (10 x $500) = $5,000 + $5,000 = $10,000 MRR⁹. What stays out of MRR: one-time setup fees, implementation services, hardware sales and non-recurring consulting⁹.

The six MRR movements

MRR can be broken down into six movements². Each one is a line on the monthly bridge from opening to closing MRR.

Adding the components gives net new MRR, a single growth figure⁷.

What is ARR, and why does it have two meanings?

ARR stands for either Annualized Run Rate or Annual Recurring Revenue¹. In modern SaaS it usually means the run rate: MRR multiplied by 12¹. The stricter definition counts only contracts of 12 months or longer¹.

Most modern SaaS companies use the run-rate meaning, because most of their revenue comes from monthly billing¹. The strict meaning is still helpful when the vast majority of revenue comes from annual or multi-year contracts¹. It is also contracted revenue, so collection is highly certain¹. ChartMogul gives a one-line check: a $6,000 contract for 4 years is $6,000 / 4 = $1,500 of ARR¹.

The label is also abused. Businesses with no subscriptions at all have used a version of the strict calculation to inflate their revenue number¹. The simplest defense is to state the definition used¹.

Is ARR just MRR times 12?

For Datadog it is. The company defines ARR as the annual run-rate revenue of subscription agreements from all customers at a point in time, calculated by multiplying MRR by 12³. For Progress Software it is not. Progress defines ARR as the annualized revenue of all active, contractually binding term-based contracts, and it annualizes each contract by dividing total contract value by the months in the term, then multiplying by 12⁴. Two companies, two formulas, one acronym.

Short contracts show where the recipes split. Annualizing a contract shorter than a year puts more into ARR than the contract is worth at the end of the period⁴. Maxio’s advice follows from that: where contracts of under a year are in the mix, use MRR as the normalized performance metric⁸. ARR is difficult to apply to terms under a year⁸.

How to calculate ARR: the formula and a worked example

How do I calculate ARR for a complex company?

Split the contracts by type, convert each to a monthly amount, add them up as MRR, then apply the ARR definition the company reports^{2, 1}. Orchard is our made-up software company. It has 40 customers on a $50 monthly plan, 10 customers who each paid $1,200 for a full year, and one customer on a three-year contract worth $36,000 in total. It also charged a single $2,000 setup fee. These inputs are invented. The tables apply the sourced rules to them.

Worked example (our arithmetic): Orchard’s MRR (MRR rule from²)

Worked example (our arithmetic): Orchard’s ARR, two ways (definitions from¹)

The gap is not an error. The strict figure leaves out the monthly plans because the strict definition excludes anything under 12 months¹. An investor shown “$48,000 ARR” and a lender shown “$24,000 ARR” for the same company (the two results of the Orchard example above) are both seeing true numbers, which is why the definition has to travel with the figure¹.

When to use ARR vs MRR

MRR is especially valuable when the business is still finding product-market fit and growing quickly⁷. It reflects the impact of pricing changes and experiments almost immediately⁷. ARR becomes more useful as the business matures and decisions stretch beyond the next few months⁷. Companies use both, because MRR can show churn or a slowdown before it materially affects annual performance, and ARR shows whether the issue is isolated⁷.

Mercury observes that ARR vs MRR debates typically fade once ARR becomes the primary benchmark⁹. Whatever the choice, the rule that matters is consistency: define each metric once, write it down and apply the same formula across dashboards, updates and board materials⁹.

ARR vs revenue: where ASC 606 comes in

Revenue is defined by an accounting standard. Under ASC 606 the core principle is that an entity recognizes revenue to depict the transfer of promised goods or services in an amount that reflects the consideration it expects to be entitled to⁵. The last of its five steps is to recognize revenue when, or as, the entity satisfies a performance obligation⁵. A service delivered over time is recognized over time when the customer simultaneously receives and consumes the benefits as the entity performs⁵.

ARR sits outside that framework. At Datadog, ARR and MRR do not represent revenue under GAAP on a monthly or annualized basis, because they are operating metrics affected by contract start and end dates and renewal rates^{3, 5}. Progress reaches the same point in different words: ARR is not defined in GAAP and is not derived from a GAAP measure, and it generally aligns to billings, while GAAP revenue aligns to the transfer of control of each performance obligation^{4, 5}. ASC 606 has its own vocabulary for the pieces: a contract is an agreement that creates enforceable rights and obligations⁵, and the transaction price is the consideration the entity expects to be entitled to⁵.

Maxio’s practical reading: the annual recurring revenue ascribed to a contract element is in most situations roughly equal to the GAAP revenue for that element^{8, 5}. It is still an imprecise financial expression that should never be confused with reportable GAAP revenue^{8, 5}. ARR also does not account for revenue recognition^{8, 5}. A one-time contract, such as a $50,000 project, counts as revenue but not as ARR⁹. A company that wants a clean vocabulary uses “GAAP revenue” for the income statement and “ARR” or “MRR” for subscription analytics^{8, 5}.

How public companies define ARR

Two large filers make the point. They use the same acronym and different recipes.

For Progress, ARR has no standardized meaning, so it is unlikely to be comparable to similarly titled measures at other companies⁴. ARR is also not a forecast, because active contracts may or may not be extended or renewed⁴.

The SEC’s guidance on key performance indicators asks public companies for a clear definition of the metric and how it is calculated⁶. It also asks for the reasons the metric is useful to investors⁶. If the method changes, the company considers whether to recast prior metrics so the current disclosure sits in context⁶. A private company reporting to its board can borrow the same discipline.

Related terms: ACV, CARR and CMRR

ACV, ARR, MRR and CARR are connected but are not synonyms⁹.

Mercury’s ACV example: 10 customers each paying $20,000 a year give ARR = 10 x $20,000 = $200,000 and ACV = $200,000 ÷ 10 = $20,000⁹. Its CARR example: a contract signed in June that starts billing in September is committed and legally contracted, but not yet contributing to active ARR⁹. CARR is easy to misuse when founders inflate it with loose or potential commitments⁹. Few billing platforms track ARR at all, and most favor MRR⁸.

Common mistakes

• Counting one-time fees. Folding one-time fees or services revenue into ARR overstates predictable, recurring revenue¹.
• Recording an annual contract at full value. It should be spread across the months it covers².
• Mixing recipes. Two ARR figures built differently are not comparable, as Progress warns of its own metric⁴.
• Treating ARR as a forecast. Contracts in the figure may or may not renew⁴.
• Annualizing short contracts. The result can exceed the contract’s value at period end⁴.
• Confusing ARR with revenue. ARR is an operating metric and the income statement follows ASC 606^{3, 5}.

Reporting ARR in a board package

A board package needs three lines next to the number: the definition, what is excluded and whether the recipe changed since the last report⁶. When ARR is MRR × 12, say so³. When it annualizes each contract’s value, say that⁴. Show the bridge from opening to closing with the six MRR movements, and compute the ratio that relies on it, net revenue retention, on the same recipe. The funding-side use of the same number is covered in how venture rounds work.