Overview
MRR (Monthly Recurring Revenue) and ARR (Annual Recurring Revenue) are the two headline metrics every subscription business uses to measure size, health, and growth, whether it's a two-person SaaS startup or a publicly traded software company. This article walks through calculating both from your pricing tiers and customer counts, projecting next month's revenue using your churn rate, and the mistakes that most often distort these numbers.
It's written for founders, SaaS finance teams, and anyone preparing investor updates or board decks who needs these numbers reported correctly rather than approximated.
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, excluding 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. A tier billed annually at $1,200/year has a monthly-equivalent price of $100 for MRR purposes, so 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, not those in a cancelled or expired state. Free trial users, free-tier users if you run a freemium model, and customers sitting in a grace period after a failed payment should generally stay out of the count until they convert to 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 holds steady for 12 months, which isn't the same as a forecast of actual revenue over the next year once new sales, expansion, and churn get factored in.
Step 5: Project next month's MRR using your churn rate
Once 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
Treat that as the floor. Actual next-month MRR will run higher once new and expansion MRR get added on top of this churn-adjusted baseline.
Step 6: Break down MRR movement into its components
For the full picture, split 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 shows whether growth is durable, built on expansion and low churn, or fragile, entirely dependent on new sales outrunning churn.
The MRR / ARR calculator runs 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 is a frequent slip. Setup fees, professional services, and usage overages inflate MRR with dollars that won't repeat, weakening the metric as a predictor of future revenue.
Forgetting to normalise annual contracts causes similar damage. Counting a full annual payment in the month it's received, instead of dividing by 12, creates an artificial MRR spike that doesn't reflect the underlying recurring base.
Ignoring downgrade contraction hides a real problem. A business can show flat or growing customer counts while MRR quietly erodes from existing customers moving to cheaper tiers, so logo churn and revenue churn need separate tracking.
Naively multiplying a spiky month by 12 for ARR overstates the durable run-rate. If a single large one-time enterprise deal lands in one month, that month's MRR times 12 won't reflect reality, so 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 stay roughly stable within the period measured. For businesses with a highly seasonal or volatile customer base, calculate MRR on a trailing basis, averaged over the past 3 months for example, 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