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How to Calculate MRR and ARR

Calculate MRR and ARR step by step — multi-tier pricing, new vs expansion vs churned MRR, and how to project next month's revenue using your churn rate.

Updated 2026-06-29

Free calculators used in this guide

MRR / ARR CalculatorChurn Rate CalculatorCustomer Lifetime Value CalculatorCustomer Acquisition Cost Calculator

Overview

MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) are the two headline metrics every subscription business — from a two-person SaaS startup to a publicly traded software company — uses to measure size, health, and growth. This article walks through exactly how to calculate both from your pricing tiers and customer counts, how to project next month's revenue using your churn rate, and the most common mistakes that distort these numbers.

This guide is for founders, SaaS finance teams, and anyone preparing investor updates or board decks who needs to report these numbers correctly rather than approximate them.

What You Need

Before calculating MRR and ARR, gather:

  • Price per customer for each pricing tier you offer (monthly equivalent, even for annual contracts)
  • Number of active, paying customers on each tier
  • Your monthly churn rate (the percentage of MRR or customers lost each month), if you want to project forward
  • A clear definition of what counts as "recurring" at your company — exclude one-time fees and usage overages from this calculation

Steps

Step 1: List every active pricing tier and its monthly price

Write down each tier's price normalised to a monthly figure. If a tier is billed annually at $1,200/year, its monthly-equivalent price for MRR purposes is $100 — divide the annual contract value by 12. Mixing un-normalised annual figures into a "monthly" calculation is the single most common source of MRR errors.

Step 2: Count active, paying customers per tier

Count only customers actively paying and not in a cancelled or expired state. Free trial users, free-tier users (if you have a freemium model), and customers in a grace period after a failed payment should generally be excluded until they convert to a paying status.

Step 3: Calculate MRR per tier, then sum

For each tier: Tier MRR = Monthly Price × Active Customers on that Tier. Sum across all tiers for total MRR.

Tier Price/month Customers Tier MRR
Starter $29 100 $2,900
Pro $99 40 $3,960
Enterprise $499 5 $2,495
Total MRR 145 $9,355

Step 4: Multiply MRR by 12 to get ARR

ARR = MRR × 12 = $9,355 × 12 = $112,260

This is a run-rate calculation — it assumes the current MRR base persists unchanged for 12 months. It is not a forecast of actual revenue over the next year, which will differ once you account for new sales, expansion, and churn.

Step 5: Project next month's MRR using your churn rate

If you know your churn rate, you can estimate a baseline for next month before adding new sales:

Projected Next-Month MRR = Current MRR × (1 − Monthly Churn Rate)

At a 3% monthly churn rate: $9,355 × (1 − 0.03) = $9,074.35

This is the floor — actual next-month MRR will be higher once new and expansion MRR are added on top of this churn-adjusted baseline.

Step 6: Break down MRR movement into its components

For a complete picture, separate total MRR change into: New MRR (from new customers), Expansion MRR (upgrades, add-ons, seat growth from existing customers), Churned MRR (from cancellations), and Contraction MRR (from downgrades). Net New MRR = New + Expansion − Churned − Contraction. This breakdown reveals whether growth is durable (driven by expansion and low churn) or fragile (dependent entirely on outrunning churn with new sales).

Use the MRR / ARR calculator to run all of this across your own pricing tiers, customer counts, and churn assumptions in one place.

Common Mistakes to Avoid

  • Including one-time and non-recurring revenue — setup fees, professional services, and usage overages inflate MRR with non-repeating dollars, making the metric a worse predictor of future revenue.
  • Forgetting to normalise annual contracts — counting a full annual payment in the month it's received (rather than dividing by 12) creates artificial MRR spikes that don't reflect the underlying recurring base.
  • Ignoring downgrade contraction — a business can show flat or growing customer counts while MRR quietly erodes from existing customers moving to cheaper tiers; logo churn and revenue churn must be tracked separately.
  • Naively multiplying a spiky month by 12 for ARR — if a single large one-time enterprise deal lands in one month, multiplying that month's MRR by 12 overstates the durable annual run-rate; normalise for known anomalies before reporting ARR externally.

Formula & Methodology

MRR = Σ (Monthly Price of Tier × Active Customers on Tier), summed across all pricing tiers

ARR = MRR × 12

Net New MRR = New MRR + Expansion MRR − Churned MRR − Contraction MRR

Projected Next-Month MRR = Current MRR × (1 − Monthly Churn Rate)

These formulas assume monthly churn and pricing are roughly stable within the period measured. For businesses with highly seasonal or volatile customer bases, calculate MRR on a trailing basis (e.g., averaged over the past 3 months) to smooth out noise before reporting trend lines.

Key Terms

  • MRR — Monthly Recurring Revenue; the predictable revenue collected each month from active subscriptions
  • ARR — Annual Recurring Revenue; MRR annualised, calculated as MRR × 12
  • Churn Rate — the percentage of customers or revenue lost in a given period
  • CLV — Customer Lifetime Value; total revenue expected from a customer over their lifetime
  • CAC — Customer Acquisition Cost; the total cost to acquire one new paying customer
  • Burn Rate — the rate at which a company spends its cash reserves relative to its revenue

Frequently Asked Questions

Include them, but normalise the value. An annual contract worth $1,200 contributes $100 to MRR, not the full $1,200 in the month it's paid. This keeps MRR a true monthly run-rate regardless of how individual customers are billed — mixing normalised and non-normalised figures is one of the most common MRR calculation errors.
No. MRR should only reflect predictable, recurring subscription revenue. Setup fees, professional services, and variable usage charges (unless the usage itself is contractually guaranteed at a minimum) are excluded because they don't repeat reliably and would make MRR a less useful predictor of future revenue. Use the [MRR / ARR calculator](/mrr-arr-calculator/) with only your recurring tier pricing to keep this clean.
If you calculate ARR as a strict MRR × 12, it will always be exactly 12x — any mismatch usually means someone is reporting a different, adjusted ARR figure that's been normalised for one-time spikes or known upcoming churn, rather than a pure run-rate multiplication. Always confirm whether a reported ARR figure is raw MRR × 12 or an adjusted forecast before comparing it to your own.
New MRR comes from newly acquired customers in a given month. Expansion MRR comes from existing customers upgrading, adding seats, or buying add-ons. Churned MRR (and contraction MRR for downgrades) reduces the total. Net New MRR = New MRR + Expansion MRR − Churned MRR − Contraction MRR — tracking these four components separately reveals whether growth is healthy (driven by expansion and retention) or fragile (entirely dependent on new sales outrunning churn).
Projected Next-Month MRR = Current MRR × (1 − Monthly Churn Rate), assuming no new sales or expansion. For example, $9,355 in MRR with 3% monthly churn projects to $9,074.35 the following month if nothing else changes. This is a baseline floor — actual next-month MRR will be higher once you add expected new and expansion MRR on top.
Yes, for most SaaS businesses. A 5% monthly churn rate compounds to roughly 46% of customers lost annually if uncorrected, and shortens average customer lifetime to about 20 months (1 ÷ 0.05). Healthy SaaS benchmarks are typically under 2% monthly churn for SMB-focused products and well under 1% for enterprise products with multi-year contracts. Use the [churn rate calculator](/churn-rate-calculator/) to see how your churn rate affects average customer lifetime.
SaaS companies are commonly valued as a multiple of ARR — often 3x to 15x depending on growth rate, gross margin, and net revenue retention. Because ARR is just MRR x 12, even small improvements in monthly MRR growth compound into materially higher ARR over a year, which is why investors track month-over-month MRR growth rate as closely as the absolute MRR figure.
Yes, through downgrade churn (also called contraction). If a customer moves from a $99/month tier to a $29/month tier, MRR drops by $70 even though that customer is still active and counted in your headcount. This is why tracking gross revenue churn (dollars lost) separately from logo churn (accounts lost) matters — a business can have very low logo churn but still see MRR erode from downgrades.
Early-stage SaaS companies (pre-seed to Series A) often aim for 10-20% month-over-month growth, though this pace is hard to sustain for long. Growth-stage companies more commonly target 3-7% monthly, which compounds to roughly 50-100%+ annually. As the revenue base grows larger, the same percentage growth requires far more absolute new dollars each month, which is why growth rates naturally decelerate over time even at healthy companies.
Early-stage companies (typically under $1M-$2M in annual revenue) usually report MRR because month-to-month movement is the more actionable signal at that scale. Once a company stabilises and crosses into multi-million-dollar revenue, ARR becomes the standard headline metric because it aligns with annual budgeting, contract values, and valuation multiples that investors use to benchmark the business.
Calculate each tier separately — price per customer multiplied by number of customers on that tier — then sum the tiers for total MRR. A business with 100 customers at $29/month, 40 at $99/month, and 5 at $499/month has $9,355 total MRR, none of which is visible by looking at any single tier in isolation. The [MRR / ARR calculator](/mrr-arr-calculator/) handles this multi-tier summation automatically.

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