Guide · 3 min read ·
MRR, ARR and ARPA explained for SaaS founders
Three small abbreviations run most conversations about a subscription business: MRR, ARR and ARPA. Founders use them to track progress, investors use them to judge growth and buyers use them to put a price on a company. This guide explains what each one means, how to count them correctly and what the numbers can and cannot tell you.
What MRR is
MRR stands for monthly recurring revenue. It is the predictable subscription income you can expect each month from your active customers. To work it out, add up the monthly price of every active subscription. A customer paying 49 dollars a month adds 49 to your MRR, and ten of them add 490.
The word recurring matters. One time fees, setup charges, consulting income and one off purchases are not part of MRR, because you cannot count on them next month. Keeping MRR clean is what makes it a useful number.
How to count annual and discounted plans
Not every customer pays monthly. If someone pays 240 dollars once a year, treat it as 20 dollars of MRR, which is the annual price divided by twelve. The same goes for quarterly plans. If a customer has a lasting discount, count the price they actually pay, not the list price. Free trials and free plans count as zero until they convert.
In the calculator above, enter each plan as its monthly price and the number of customers on it. If you sell an annual plan, convert it to a monthly equivalent first.
ARR and when to use it
ARR is annual recurring revenue, which is simply MRR multiplied by twelve. It is the number most often quoted when a company is valued, because it puts revenue on the same yearly scale as costs and growth targets. Early on, many founders prefer to talk in MRR because it moves faster and shows momentum month to month.
Be careful with ARR when your business is seasonal or has many short contracts. Multiplying one strong month by twelve can overstate what you will really earn.
ARPA and what it tells you
ARPA is average revenue per account: your MRR divided by your number of paying customers. It shows how much a typical customer is worth each month, and it is a key input when you work out lifetime value. A rising ARPA usually means you are moving up market, selling higher plans or adding paid extras. A falling one can mean heavy discounting or a flood of small customers.
Watch ARPA alongside the plan breakdown. The chart under the calculator shows which plan brings in most of your revenue. If one plan makes up nearly all of it, your business depends heavily on one price point and one kind of customer.
Using the twelve month what if
The projection simply compounds a monthly growth rate. Five percent growth a month sounds modest, yet it nearly doubles revenue in a year. That is the point of the exercise: small differences in growth rate create large differences over time, so you can see what a realistic target might do.
It is not a forecast. Real growth bumps along, slows as markets saturate and gets hit by churn. Use the projection to compare scenarios, such as three percent against six percent, not to promise a number to anyone.
Common mistakes with recurring revenue
Most errors come from counting too much or counting the wrong period.
- Including one time payments or services in MRR.
- Counting trials or unpaid invoices as revenue.
- Using the list price when customers pay a discounted price.
- Treating an annual payment as one month of revenue.
- Ignoring cancellations, which make MRR look better than it is.
Where to go next
Revenue growth only counts if customers stay. Measure that with the churn calculator, then see how much each customer is really worth with the LTV to CAC calculator. When you are ready to show people what you have built, claim your free tile on CircleSaaS and put your startup in front of people who browse for new tools.