MRR and ARR

Recurring revenue is the number investors care about most — and the one founders most often calculate wrongly.

What is it?

MRR is Monthly Recurring Revenue: predictable revenue that repeats every month from subscriptions or contracts.

ARR is MRR × 12 — the annualised run rate.

The word doing the work is recurring. A one-off payment is revenue, but it is not MRR, because next month it is not there.

Why does a founder care?

Because recurring revenue is predictable, and predictability is what makes a company fundable and plannable. $10k of MRR means you start next month at $10k before doing anything; $10k of project revenue means you start at zero.

It is also the number every investor will ask for first, and mis-stating it is a fast way to lose credibility in diligence.

Example

A company's March revenue was $23,000, made up of:

  • 60 customers × $200/mo subscriptions = $12,000 ✅ MRR
  • One annual plan at $6,000 paid upfront = $500/mo ✅ MRR (spread over 12 months)
  • A $5,000 one-off setup project = $0 ❌ not MRR
  • $4,500 of consulting = $0 ❌ not MRR

    • So revenue was $23,000 and MRR is $12,500. ARR is $150,000.

    Calling this a '$276k ARR company' — annualising all $23k — is the classic error. It is also the exact thing a diligence process finds, and it damages trust far more than the smaller true number ever would.

    The common mistake

    The big one is annualising non-recurring revenue, as above. The second is counting a customer who has given notice but has not left yet. The third is including trials that have not converted.

    All three inflate the number, all three are found later, and all three make everything else you said look less reliable.

    How it works

    Step 1: List every source of revenue

    Every customer, every plan, every project.

    Step 2: Mark each one recurring or not

    Ask: will this same amount arrive next month without anyone signing anything new? If no, it is not MRR.

    Step 3: Normalise annual contracts to monthly

    A $6,000 annual plan is $500 of MRR, not $6,000 in the month it was paid.

    Step 4: Subtract known departures

    A customer who has given notice should come out of MRR at the point they leave, and you should know that number is coming.

    Step 5: Track the movement, not just the total

    New MRR, expansion MRR, churned MRR. The composition tells you far more than the headline: $12k that grew from $8k is a different company from $12k that shrank from $16k.

    When to use this

    Monthly, and in every investor conversation. Track the movement breakdown once you are past roughly 20 customers.

    When not to use it

    If you are not a subscription business, do not force it. A marketplace tracks GMV and take rate; an e-commerce business tracks repeat rate and cohort revenue. Reporting a fake MRR because investors expect one is worse than reporting the right metric for your model.

    Do this now

    Apply this to your own startup in My Full Journey (free account).