Beyond Basic Revenue Streams: How Startups Can Capitalize on MRR & ARR
ARR and MRR provide certainty into total monthly revenue and is key to understanding the momentum across your entire customer base.
Experimentation is inherent in running a startup. Some experiments will yield favorable results, and some will disappoint (hopefully you’re tracking the results). On the road ahead, you’ll experience twists, turns, stops, starts, and, of course, the infamous “pivot.” Will your newly hired CTO inspire her team and drive innovation? What kind of ROI will your latest acquisition campaign yield? Will your new product launch generate a surge of demand or hit the market with a barely audible thud?
With so many variables in play, you might find yourself wishing for some sort of GPS for business success. Alas, that doesn’t exist—but while you wait for some other enterprising startup to invent one, you CAN generate predictability around your recurring revenue streams. In fact, this is one of the most important metrics your business can track.
MRR & ARR: What Do They Mean?
So, what is MRR and ARR and what exactly do they mean? MRR is your monthly recurring revenue, i.e., the sum of all monthly revenue you earn from your customers, regardless of their contract length. ARR is your annual recurring revenue, i.e., the sum of all revenue derived from customer contracts that are 12 or more months long and active at the end of the period.
How Do You Calculate MRR & ARR?
To calculate MRR, divide each customer’s total contract value by the number of months in their full contract. Sum the results to get your total MRR.
To get an annual view of your recurring revenue there are two options "ARR" and "Annualized MRR". If your business primarily sells monthly recurring subscriptions "Annualized MRR" is a great indicator to measure customer momentum.
Tracking your annual recurring revenue, or ARR, is similar, but only looks at customer contracts that are greater than or equal to 12 months. This extra filter on annual deals will likely result in “ARR” being smaller than “Annualized MRR”, but reduces the noise of churn from shorter term deals.
Why Is It Important to Track Your Recurring Revenue?
Knowing your MRR provides short-term certainty into total monthly revenue and is key to understanding the momentum across your entire customer base. However, it doesn’t provide great long-term visibility into how much of your revenue will reoccur—one-time revenue spikes are exciting, but if they aren't repeatable, they won't help you achieve consistent growth year over year. ARR is a better metric to help signal revenue predictability for the long game.
The bigger story here is that tracking MRR and ARR provides essential insight into your product-market fit, your short- and long-term momentum, and the trajectory of your recurring revenue, helping you to know how and when to invest in the business. It’s worth noting that MRR and ARR are point-in-time metrics, (when it comes to documenting your revenue story, they’re a snapshot, not a feature-length film), so it's also helpful to understand how and why these metrics change over time, be it due to new business, customer churn, or updates to your pricing structure.
The Challenges of Calculating MRR & ARR
Your customer relationship management system (CRM) can house your customer data, but it won’t automatically categorize your revenue streams as recurring or non-recurring, and it certainly won’t help you track the changes in your ARR and MRR or help you understand the how and why behind those changes.
Your enterprise resource planning (ERP) system stores your generally accepted accounting principles (GAAP) revenue calculation, but since MRR and ARR are non-GAAP terms, you won’t find these metrics here.
The point is: There’s no canonical system to track your MRR and ARR. These metrics are most likely tucked away in a spreadsheet that’s tracked by one or two people at your company, and they’re almost always stale, rearview-mirror calculations that offer little in the way of workable insight.
How to Do Way More With Your MRR & ARR
Mosaic connects seamlessly to your CRM to automatically calculate your MRR, annualized MRR, and ARR based on contract dates. Mosaic can also connect to your ERP so you can compare your GAAP revenue against your ARR and MRR so you can easily understand how the two metrics differ. Even better, it tracks changes in these metrics to show you exactly how each metric is growing or contracting. This dynamic reporting not only helps you derive a deeper understanding of your revenue’s history, it enables way-more-accurate revenue forecasts and way-more-strategic investments—and the list of things you can do with THAT is virtually endless.