Definition
Monthly recurring revenue (MRR) is the recurring subscription revenue a business expects to bill in a normal month, measured at a point in time. Annual plans are spread evenly across 12 months, and one-off fees are left out. Tracking how MRR changes each month, split into new, expansion, contraction and churned MRR, shows where growth comes from.
Worked example
Parcelpath is a fictional UK software business. At the start of March its MRR is £50,000. During the month:
- new customers add £4,000
- existing customers upgrade by £1,000 (expansion)
- some customers downgrade by £500 (contraction)
- customers who cancel take away £2,500 (churn)
MRR at the end of March = £50,000 + £4,000 + £1,000 minus £500 minus £2,500 = £52,000.
A customer on an annual plan paying £12,000 contributes £1,000 of MRR each month, not £12,000 in the month the invoice is raised.
Churn is the rate at which a business loses customers or recurring revenue over a period. Customer churn and revenue churn can tell very different stories.
Why buyers care
MRR is the figure many subscription businesses are run on, and multiplying it by 12 gives ARR, so any error carries straight into the price. A business can show rising MRR while losing customers quickly, as long as new sales keep outpacing cancellations. The movement table reveals whether that is happening.
Ask for monthly MRR movements for at least the last two years and reconcile them with the billing system and bank deposits. Watch for annual prepayments counted as a single month's MRR, free trials counted as paying customers and a sudden rise just before the business was listed.
Annual recurring revenue (ARR)
Annual recurring revenue is the yearly value of subscription or contracted revenue expected to repeat, measured at a point in time. Software businesses are often priced as a multiple of it.