What are ARR and MRR?
ARR is an annual revenue metric. It refers to the value of a subscription business’s recurring revenue, normalised for one year. For a SAAS business it is arguably the most important metric as it leads directly to the valuation of the company. One of the most common ways to value a SAAS business is as a multiple of ARR.
MRR is a monthly metric and is used to derive ARR. It equals the number of subscribers per month multiplied by the ARPU (Average Revenue per User).
In the tech industry, deriving ARR as a multiple of MRR tends to be the preferred model. It involves additional customers coming on board over the year, which can impact on revenue exponentially. A fast growing business will add new customers each month and if they retain them this leads to growth in ARR.
In a business that offers, say, three-year subscriptions, ARR would be equal to subscription revenue divided by three. You would then divide this by 12 to understand the impact on MRR. It is critical to work multi year or month sales back to the correct monthly figure – this avoid inflating the ARR and therefore anticipated valuation multiples.
How to calculate MRR and ARR
Here are some examples:
- Month 1: 100 users at $99 per month = MRR of $9,900, and ARR (MRR x 12) of $118,800.
- Month 2: 110 users at $99 per month = MRR of $10,900. Now ARR has increased to $130,680 (NTM).
Note: when calculating these metrics, it’s assumed that once a customer subscribes, they will be retained. Dealing with loss of customer or churn is critical to the valuation of technology companies. See the RSM article on Customer Churn: What it is and How it Affects Tech Companies.
MRR also comprises other components on top of new customer revenues.