top of page

ARR vs. MRR: Why and How to Choose?

Updated: May 29

Companies that offer services on a subscription basis face the dilemma of monthly or annual revenue. So, let's talk about ARR, which stands for recurring yearly revenue, or MRR, which stands for monthly income.

ARR vs MRR

1 – MRR: definition, advantages, and disadvantages

Every subscription-based business struggles with defining its recurring revenue. For example, if you offer monthly contracts in SaaS mode, you are concerned by the MRR model.


1.1 - MRR: what is it?

The MRR or monthly recurring revenue corresponds to the addition of the turnover of all the subscriptions in monthly value. The clientele fluctuates, and so do the contracts. We will see how these variations are considered in the calculation formula. With Monthly Recurring Income type subscriptions, the customer pays for the service every month and not every year.


1.2 – Calculation of the MRR for SaaS-type companies

To define the Monthly Recurring Revenue, a "software as a service" company takes into account the following elements:

  • Income from new contracts taken out

  • Add contract upgrades, upgrades, or extensions.

  • Deduction of downgrades, downgrades, or contractions for the transition to lower versions

  • Deletion of canceled subscriptions

1.3 – Advantages and disadvantages of the MRR method

Running an MRR-like revenue-based SaaS has several disadvantages that are obvious at first glance. Yet many companies survive with this model. So, let's see the characteristics of this type of financial management.

  • The significant disadvantages of MRR for a SaaS company: If your customers commit monthly, it is difficult to have long-term visibility regarding customer portfolio and recurring revenue is difficult to have long-term visibility of customer portfolio and recurring revenue. This is a real disadvantage in cash flow, especially if you have development projects. Managing churn or any measure of losing customers or subscribers is also challenging.

  • Do the benefits of MRR exist? Finding business-side benefits is more complicated than invoices on this model. However, as we can see, the service pricing is generally higher in MRR than in ARR. This is a plus for SaaS profitability. Having long-term visibility regarding customer portfolio and recurring revenue is difficult


2 – ARR: definition, advantages, and disadvantages

Before discussing the ARR vs. MRR match, let us understand the features of the ARR business model. For which customers is it suitable? Which is more immediate for the business with recurring revenue? Finally, what are the constraints of the Recurring Annual Income system?


2.1 - ARR income: what is it?

Does your SaaS present the customer invoice in the ARR model? Then, you have annual recurring income calculated over 12 months. As for the MRR scheme, it is necessary to consider the different flows that vary the commercial perimeter and the services. Thus, the customer who brings you a recurring annual income commits for at least one year.


2.2 – Calculation of the ARR for a SaaS company

If you adopt the Annual Recurring Income method, the elements included in the formula for calculating your TAR are identical to those for MRR-type benefits:

  • Revenue from new subscriptions

  • Revaluation of existing contracts

  • Deduction of downgrades

  • Removal of subscription cancellations

The distribution and evolution of these four flows allow the analysis of your recurring income.


2.3 – Advantages and disadvantages of the ARR model

The SaaS that manages to seduce its customers through the sale of annual subscriptions benefits from undeniable advantages in managing its management and cash flow. However, certain constraints exist with ARR-type invoicing formulas.

  • ARR: the advantages of this service model: SaaS benefits from having customers engaged for at least a year and paying for twelve months of services. Looking to the future in terms of cash flow is much easier. In addition, with the recurring annual revenue type operation, apprehension decreases vis-à-vis the termination rate, which is the indicator for measuring lost customers. They are loyal to you for the next 12 months! These two elements facilitate growth projects and long-term investments.

  • ARR income: its disadvantages: The consideration for the annual subscription often lies in the pricing. The SaaS-type company usually offers cheaper contracts to customers who accept a long-term commitment. This lower price is advantageous for the customer. However, it reduces the profitability of the business offering the service. However, do not omit the financial products generated by the cash received in advance.

Don't forget that your service must be solid and of good quality, with the customer paying their money at the beginning of the period. If you modify the service during the year, you cannot pass it on to the price.


Conclusion ARR or MRR

Finally, the business model or the type of SaaS customers strongly influences the choice of ARR or MRR. However, solutions indicate moving towards ARR for more visibility on your cash flow.


 

550 views0 comments

Comments


Get a Free Consultation: Experience a Demo with Real Competitors' Data

bottom of page