Quick answer
MRR (monthly recurring revenue) is what your active subscriptions are worth each month. ARR (annual recurring revenue) is the same figure over a year: ARR = MRR × 12. Both are run rates, a snapshot of today's subscriptions. Neither is the revenue you actually earned or collected over a year.
If your MRR is $8,000, your ARR is $96,000. Same business, same customers, same day. The choice between them is mostly about which time frame makes your decisions easier.
| MRR | ARR | |
|---|---|---|
| Stands for | Monthly recurring revenue | Annual recurring revenue |
| Formula | Sum of each active subscription’s monthly value | MRR × 12 |
| A $1,200 annual plan counts as | $100 | $1,200 |
| A $100 monthly plan counts as | $100 | $1,200 |
| Most useful for | Month-to-month decisions, monthly billing, early-stage products | Annual contracts, comparing scale, fundraising conversations |
| Shows a bad month | Quickly | The same change, multiplied by 12 |
If you’re not sure what goes into MRR in the first place (trials, discounts, one-time payments, cancellations), start with what is MRR. ARR inherits every one of those rules.
ARR is not your annual revenue
This is the misunderstanding that causes the most trouble. ARR annualizes today’s MRR. It assumes nothing changes for twelve months: no new customers, no churn, no upgrades.
Example
A product starts the year at $5,000 MRR and grows steadily to $15,000 MRR by December.
December ARR = $15,000 × 12 = $180,000
Revenue actually earned during the year is roughly the average MRR times 12: about $10,000 × 12 = $120,000.
Both numbers are true. ARR says where the business is heading into next year. Revenue earned says what happened this year. Quoting the first as if it were the second overstates the year by half.
ARR also isn’t cash. A customer who prepays $1,200 for a year adds $1,200 to your bank account in one month and $1,200 to ARR, but that ARR represents twelve months of service you still owe them.
Annual vs monthly billing
Billing frequency changes cash flow. It doesn’t change MRR or ARR.
| Customer | Billed | Cash in month 1 | MRR | ARR |
|---|---|---|---|---|
| A | $100 a month | $100 | $100 | $1,200 |
| B | $1,200 a year | $1,200 | $100 | $1,200 |
Customers A and B are worth the same in MRR and ARR. B is worth more to your cash flow and usually less likely to cancel mid-year, which is why annual plans are often discounted. If you offer a discounted annual plan, use the discounted price: $960 a year is $80 MRR, not $100.
When to focus on MRR
- You bill mostly monthly. MRR lines up with how customers actually pay you.
- You’re early. At small scale, a few customers make a visible difference month to month, and MRR shows it.
- You’re working on churn or pricing. Monthly movements (new, expansion, contraction, churn) show up in the month they happen. In ARR, the same changes look twelve times larger and are harder to read against the total.
When ARR is useful
- You sell annual or multi-year contracts. ARR matches how customers buy.
- You’re comparing scale. “$1.2M ARR” is the convention investors and acquirers tend to use.
- You’re planning a year ahead. Hiring and budgets are usually annual.
Some companies, especially those selling annual contracts, calculate ARR from contract values rather than MRR × 12. For subscription businesses those usually come out the same. If yours don’t, say which method you used.
Common reporting mistakes
- Calling ARR “annual revenue”. It’s a run rate. Say “ARR” or “annualized run rate”.
- Including one-time revenue. Services, setup fees and credit packs don’t recur, so they don’t belong in either number.
- Annualizing a spike. If a big usage month or a one-off deal pushed MRR up, ARR multiplies it by 12.
- Counting the full annual payment as MRR. A $1,200 annual plan is $100 MRR. Counted wrongly, it turns into $14,400 of ARR.
- Ignoring scheduled cancellations. Depending on your tool, customers who’ve cancelled but are still in their paid period may still be in MRR, and so in ARR. Know which rule your numbers use.
Comparing growth over time
To compare months, use the month-over-month MRR growth rate:
MRR growth rate = (this month's MRR − last month's MRR) ÷ last month's MRR
Growth compounds, so don’t multiply a monthly rate by 12 to get an annual one. 10% a month for twelve months is 1.1¹² ≈ 3.14 times your starting MRR, about 214% growth, not 120%.
A growth rate on its own still hides where the change came from. Two businesses that both grew $1,000 in a month can look very different underneath: one added $1,200 in new MRR and lost $200 to churn, the other added $4,000 and lost $3,000. The second has a retention problem that the growth rate won’t show. The MRR bridge will.