MRR and ARR explained: how to calculate recurring revenue

Monthly recurring revenue (MRR) is the predictable revenue your subscriptions generate each month. Annual recurring revenue (ARR) is the same figure on a yearly basis. Both exist to answer one question: how much revenue will keep arriving if nothing changes?

How to calculate MRR

Convert every active subscription to a monthly amount, then add them up. A plan billed 12,000 per year contributes 1,000 per month. A quarterly plan of 3,000 contributes 1,000 as well.

• Monthly plan: use the price as it is.
• Quarterly plan: divide by 3.
• Annual plan: divide by 12.
• Discounted plan: use the amount actually charged after the recurring discount.

What does not count

Setup fees, one-off consulting, hardware, and tax collected on behalf of the government are not recurring. Usage-based charges are a grey area: many teams include only the committed minimum in MRR and report variable usage separately.

ARR and when to use it

ARR is MRR x 12. It is most useful for businesses with mostly annual contracts. For monthly self-serve plans, MRR is the more honest number because customers can leave quickly.

Break MRR into movements

The total hides what is happening. Split the month-on-month change into four parts:

• New MRR from customers who just subscribed.
• Expansion MRR from upgrades, extra seats or add-ons.
• Contraction MRR from downgrades.
• Churned MRR from cancellations.

Knock calculates these movements from your live subscriptions, so the numbers update when a plan changes rather than at month end.