Monthly Recurring Revenue is the predictable revenue a subscription business earns each month, normalized to a monthly figure. It is the core metric for SaaS companies, a reliable indicator of business health that smooths out one-time payments, annual contracts, and variable billing into a single, comparable number.
Key Concepts
MRR has several components that tell the growth story. New MRR comes from first-time customers. Expansion MRR comes from existing customers upgrading or buying add-ons. Contraction MRR represents downgrades. Churned MRR accounts for cancelled subscriptions. Reactivation MRR comes from returning customers.
Net New MRR = New + Expansion + Reactivation - Contraction - Churn. A healthy SaaS company grows net new MRR consistently month over month.
To calculate MRR, normalize all subscriptions to monthly values. An annual plan of $1,200 contributes $100/month to MRR. A quarterly plan of $150 contributes $50/month. Do not include one-time fees, implementation charges, or variable usage overage in MRR, as these are not recurring.
Why It Matters
MRR provides predictability. Unlike one-time sales where revenue resets each month, recurring revenue compounds. $10K MRR with 10% month-over-month growth becomes $31K in 12 months. This predictability enables confident hiring, investment, and planning.
MRR growth rate is also the primary valuation driver for SaaS companies. Investors benchmark companies against "T2D3" trajectory (triple revenue twice, then double three times) for venture-scale returns. MRR composition matters too: expansion-heavy growth is healthier than new-customer-dependent growth.
In Practice
A B2B SaaS startup reports $85K MRR. Breaking it down: $25K from new customers, $12K from upgrades, $3K from reactivations, minus $5K in downgrades and $8K in churn. Net new MRR is $27K, representing 32% month-over-month growth. The expansion ratio (expansion / churn+contraction) exceeds 1.0, meaning the company grows even without new customers.
Pro Tips
Track MRR daily, not just monthly. Daily updates reveal trends faster. Separate voluntary churn (customers choosing to leave) from involuntary churn (failed payments) because they have different solutions. Monitor expansion MRR closely: net revenue retention above 120% (expansion exceeds churn) is the hallmark of elite SaaS companies.