Monthly Recurring Revenue explained for SaaS founders
MRR (Monthly Recurring Revenue) is the predictable, normalised revenue a subscription business earns each month. If you have 100 customers paying 50 pounds per month, your MRR is 5,000 pounds. It is the single most important metric for any SaaS business because it shows the health and trajectory of your revenue engine.
The basic formula is simple: sum up the monthly value of all active subscriptions. If a customer pays annually, divide their payment by 12 to get the monthly equivalent. A customer paying 600 pounds per year contributes 50 pounds to your MRR. Do not include one-off payments, setup fees, or consulting revenue. MRR only counts predictable, recurring income. Most billing tools like Stripe calculate this automatically, but it is worth understanding the components manually so you can spot discrepancies.
New MRR: revenue from new customers acquired this month. Expansion MRR: additional revenue from existing customers who upgraded or bought add-ons. Churned MRR: revenue lost from customers who cancelled. Contraction MRR: revenue lost from customers who downgraded. Net New MRR: New MRR + Expansion MRR - Churned MRR - Contraction MRR. This is the number that tells you whether your business is growing or shrinking. A healthy SaaS company has net new MRR that is positive every month.
For early-stage SaaS, a month-over-month MRR growth rate of 15 to 20% is considered strong. 10% is solid. Below 5% suggests you have a growth problem. These rates naturally decrease as your base grows. A company at 100,000 pounds MRR growing at 10% monthly is adding 10,000 per month in new revenue, which is excellent. The Rule of 40 is a useful benchmark for later stages: your revenue growth rate plus your profit margin should exceed 40%. At the early stage, focus purely on MRR growth rate and churn rate. Everything else is secondary.
ARR (Annual Recurring Revenue) is simply MRR multiplied by 12. Investors and analysts use ARR because it sounds bigger and is easier to compare across companies. A company with 10,000 pounds MRR can say it has 120,000 pounds ARR. Both numbers represent the same business. Use MRR for internal tracking because it gives you faster feedback on monthly trends. Use ARR when talking to investors because it is the standard language for valuing subscription businesses. Just make sure you are consistent and honest about which number you are quoting.