21 Apr What are MRR and ARR and How You Calculate Them
The majority of business owners and service providers put a lot of effort into providing the best possible services in their niches and marketing them appropriately. In the process, they end up neglecting the single most important cornerstone of operating a successful business: keeping their accounting books up to date.
One of the useful metrics that business operators can employ is Monthly Recurring Revenue (MRR). Simply put, the subscription business constitutes the continuous inflow of new customers and the loss of some of the existing ones. MRR helps you record this movement to show if your revenue is increasing or reducing and to what extent. Let us now delve into this explanation a little deeper.
Monthly Recurring Revenue (MRR) Definition
Monthly Recurring Income is the consistent revenue earned by your business from all active subscriptions within a given month. MRR covers recurring payments from coupons, discounts, and recurring add-ons but does not include one-time expenses.
Monthly Recurring Revenue (MRR) Calculation
I know by now you probably want to know how to calculate the MRR of your business. The procedure is fairly straightforward, simply multiply the total number of your monthly subscribers by your average revenue per user (ARPU)
MRR= No. of subscribers with a monthly plan * ARPU
Annual Recurring Revenue Definition and Calculation
Another metric that is equally as important is the Annual Recurring Revenue (ARR). ARR helps you to gauge the health of your subscription business and keep up with your revenue.
By definition, ARR is a metric that indicates the amount of money received per year throughout the duration of a subscription (contract). ARR expresses the value of a firm’s recurring revenue from contractual subscriptions for a one calendar year.
To calculate the ARR for your business, divide the value of the contract by the relative years.
ARR= Contract value / number of years
ARR only takes into account fixed contract payments and does not include one-time charges. If any additional, non-subscription charges are bundled into ARR, the accuracy of your estimates reduces.
Billing cycles have no effect on ARR as long as the subscription period is a year or more.