ARR and MRR: Which is The Right Metric for Your B2B SaaS?

In B2B SaaS, ARR and MRR are important revenue growth metrics that you need to correctly measure and track constantly to manage growth effectively. 

But why?

When correctly measured, ARR and MRR can help you with valuable insights into your current and projected subscription revenue. 

Furthermore, this helps to understand your business’s financial health so you can make strategic decisions. But, each of these metrics measures revenue within a different timeframe.

So what are ARR and MRR, and what do these two metrics mean for your business?

In this article, you will understand what ARR and MRR are, how to measure the two key metrics of the subscription business model, and much more.

Let’s get started.

What Is ARR in B2B SaaS?

One of the key aspects of good subscription management for SaaS businesses is tracking revenue within a given period. This helps you understand your financial performance so that you can make better decisions.

ARR or Annualized Recurring Revenue is a subscription-based metric that helps to track all the expected recurring revenue generated each year for the life of a subscription.

This metric is helpful for B2B SaaS companies that offer yearly contracts to predict long-term revenue growth.

Importance of ARR for B2B SaaS

ARR is an invaluable metric that helps to:

• Track expansion and contraction: ARR can help you determine whether existing customers are maximizing or minimizing their service packages.
• Track growth and make better budgeting decisions: ARR enables you to determine the number of new subscriptions or contracts you gain and how they influence your business’s growth.
• Increase revenue: Tracking ARR helps to uncover what customers want so you can adjust your marketing accordingly to drive more revenue.

How to Calculate ARR

To accurately calculate ARR, you need to have the following values:

• Annual revenue gained from renewing and new customer subscriptions
• Expansion revenue from product upgrades or add-ons
• The amount of revenue decreased due to customers who downgrade 
• Revenue churn or cancellations of subscriptions 

Note: ARR focuses on recurring revenue, churn, and downgrades.

Calculating ARR is simple:

Another simple formula for calculating ARR is to multiply your MRR by 12.

What Is MRR in B2B SaaS?

MRR or Monthly Recurring Revenue is the estimation of the amount of recurring revenue generated in a given month. This metric helps to track monthly revenue growth and future ARR growth.

The six main types of MRR are:

• New MRR: The amount of money generated from new customers who purchase a subscription in a given month

• Upgrade MRR: The amount of revenue generated from existing customers who upgrade their subscriptions in a given month

• Downgrade MRR: The reduced amount of revenue from subscribers or customers who move from a higher plan to a lower plan in a given month

• Expansion MRR: The additional revenue obtained from current customers in a specific month compared to the previous one. This could be through cross-selling, upselling, or feature additions

• Contraction MRR: The revenue lost due to subscription downgrades in a given month

• Churned MRR: This is the recurring revenue lost due to subscription cancellations in a given month

Importance of MRR for B2B SaaS

Monthly Recurring Revenue is suitable for businesses that offer monthly subscriptions.

It’s a useful subscription metric that helps to:

• Uncover monthly trends: MRR helps you assess your business’s monthly financial trends and performance

• Forecast revenue: Measuring Monthly Recurring Revenue is helpful for financial forecasting and planning

• Assess the growth and momentum of your business: A steadily rising MRR indicates the business is doing well whereas a falling MRR shows that you need to take actionable measures like reducing churn

Note: MRR doesn’t focus on one-time payments or upgrades. Also, the best way to get in-depth MRR reporting is to leverage subscription management software. Here is a list of the best subscription management tools reviewed by Attrock to help you choose a suitable solution for your business.

How to Calculate MRR

To calculate MRR, you need to have the following values:

• The total number of active monthly subscribers or customers during the tracking month—MS
• The average monthly revenue per user/subscriber or customer—ARPU 

Calculating Monthly Recurring Revenue is simple.

Pro tip: For aspiring entrepreneurs, starting a B2B SaaS business is one of the most challenging tasks. However, using a business formation service can simplify the whole process. SmallBusinessHQ has reviewed a list of reliable business formation companies to help you form your business easily.   

Conclusion

Which metrics should you rely on between ARR and MRR?

Certainly, the choice of metric to use for tracking revenue will depend on your type of business. 

ARR provides a long-term view of your business’s financial performance thus, it’s a vital metric for enterprise businesses that offer annual subscriptions of contracts. 

On the other hand, MRR provides a short-term view of your business’s financial health thus, it’s a useful metric if you deal with monthly subscriptions