For a subscription business, MRR is the single most useful number you can put on the wall. It cuts through the noise of one-time payments, upgrade timing, and billing cycles to tell you what the business is actually generating in predictable monthly revenue. Every other subscription metric is built on top of it.

Definition

Monthly Recurring Revenue (MRR) - the total subscription revenue your business can expect to collect in a normalized month, calculated by summing every active subscription expressed as a monthly amount.

Formula
MRR = Sum of (every active subscription, expressed as monthly revenue)

Normalize: monthly plan = full amount; quarterly plan ÷ 3; annual plan ÷ 12.

Net New MRR (month over month) = New MRR + Expansion MRR − Contraction MRR − Churned MRR
Worked example
A SaaS business has 100 customers paying $50/month, 30 customers paying $200/month, and 5 customers on annual contracts at $2,400/year ($200/month equivalent). MRR = (100 × $50) + (30 × $200) + (5 × $200) = $12,000.

What counts (and doesn't) in MRR

The rule is simple: only revenue that is reliably recurring counts in MRR. Anything one-time or unpredictable sits outside.

  • In MRR: Monthly subscriptions, annual subscriptions (÷12), quarterly subscriptions (÷3), recurring add-ons.
  • Not in MRR: One-time setup or onboarding fees, professional services, overage charges that aren't predictable, refunds, discounts (some treat these differently).

The four components of MRR change

MRR doesn't move in one direction; it moves in four independent ones at the same time. Breaking out the components is where MRR becomes diagnostic.

New MRR

Revenue from customers who signed up this month. The headline "growth" number most often quoted.

Expansion MRR

Existing customers who paid more this month than last - upgrades to higher plans, additional seats, additional usage. Often the single highest-leverage growth lever in a mature subscription business.

Contraction MRR

Existing customers who paid less - downgrades, seat reductions, moving to cheaper plans. A growing contraction number can hide inside otherwise strong MRR growth.

Churned MRR

Revenue lost from customers who cancelled entirely. The most visible churn number, and the one most subscription businesses watch obsessively.

Net New MRR is the bottom line

Formula
Net New MRR = New + Expansion − Contraction − Churned

A single number that tells you whether the subscription business grew or shrank this month, and by how much. Positive Net New MRR means growth; negative means contraction.

Two businesses with identical $10K Net New MRR can look very different:

  • Business A: $15K New, $0 Expansion, $5K Churned. Growing from new sales, losing some to churn.
  • Business B: $5K New, $10K Expansion, $5K Churned. Growth driven mostly by existing customers expanding.

Business B is healthier - expansion is a sign of product-market fit, and it's usually cheaper than new acquisition.

Net Revenue Retention

A related concept: Net Revenue Retention (NRR) measures what happened to last year's cohort. Did they collectively pay more, less, or about the same this year?

Formula
NRR = (Starting MRR + Expansion − Contraction − Churned) ÷ Starting MRR × 100%
Worked example
A cohort started the year at $100K MRR. By year-end, $10K of them had upgraded (Expansion), $3K downgraded (Contraction), and $7K had cancelled (Churned). NRR = ($100K + $10K − $3K − $7K) ÷ $100K = 100%. The cohort is exactly stable - new sales would drive any headline growth.

NRR above 100% means existing customers grew more than they shrank - a strong sign. NRR above 120% is considered excellent for B2B SaaS.

Common mistakes with MRR

1. Including one-time revenue in MRR

Setup fees, professional services, and overage charges inflate MRR and create false confidence. They're real revenue, but they're not recurring - track them separately.

2. Not normalizing annual contracts to monthly

A $24,000 annual contract booked in January isn't $24,000 of January MRR - it's $2,000/month for 12 months. Booking it as $24,000 makes MRR look enormous in January and flat for the rest of the year.

3. Watching only Net New MRR without breakdown

A flat Net New MRR can hide a business where new acquisition is dropping fast and expansion is masking it. Always look at the four components separately.

4. Confusing MRR with cash

A $12K annual contract paid upfront is $1K of MRR per month but $12K of cash in month 1 and $0 in months 2-12. Don't mix them up when budgeting.

Related concepts