What it means:

MRR and ARR refer to monthly and annually recurring revenue, respectively. This is measured by looking at the value of contracted agreements that corresponds to a recurring revenue stream. The easiest way to imagine this is to think about a Netflix subscription. You have signed up for it and it charges you monthly for $6.99. This would be considered $7 of MRR or $84 of ARR for Netflix

Why it matters:

MRR and ARR are great metrics to use in SaaS because they tell a better story than revenue alone. If you are selling goods like cookies, the user has to come back and manually order every time that they want your goods. However, with a SaaS product, they are going to continue to pay for your service until they cancel their monthly subscription. In the B2C world, this can fluctuate significantly depending on your product, but in the B2B world, contracts are typically longer and this fluctuates less significantly. Additionally, a lot of investors will use ARR as a metric to track against total cash burn, looking for companies to have more ARR than inception to date cash burn.

Places it is used:

Some examples of where we commonly use ARR is when looking at items like customer acquisition costs and lifetime value before a company has long term data. When you know how much it costs to acquire a customer, you can see what the average ARR is generated from these costs to determine if you are getting sufficient short term gain on your spend. Another place that ARR is useful is when looking at company efficiency metrics. The amount of ARR that a single customer service representative is managing, is likely to be a good indicator of whether or not they have the right workload.

Where it gets tricky:

ARR and MRR can become tricky when trying to talk about the MRR and ARR attribution from an individual contract. This can be hard when there are multiple items on the contract such as discounts, one-time implementation fees, and delayed payment starts. Let’s look at how MRR, Revenue, and cash collection can differ:

In this example, imagine you sign a customer to a one-year contract that costs $1,000 / month but they are going to pay it all upfront to get 10% off. Additionally, they will pay a $3,000 implementation fee. Here’s how this flows through your accounting books for the next 3 months: