By Clayton Whitfield, SaaSOptics
MRR is the most popular method of normalizing recurring revenues for subscription analytics. Normalized revenue provides a clearer picture of performance, especially when reported in categories relative to prior periods.
So, what's up with the less-talked-about cousin, ARR? Are there any real differences, other than the obvious? Why use ARR vs. MRR in your business? How will bankers and VCs react to ARR vs MRR?
Is it really that simple? Monthly vs. Annual? Yes, it is. ARR is 12x MRR; MRR is ARR/12.
Objectively speaking, there really are no compelling reasons to standardize on ARR versus MRR. Class dismissed. For those wanting extra credit, read on.
ARR is used almost exclusively in B2B subscription businesses and only when the minimum subscription term is a year. But, MRR is by far and away the most popular normalized revenue method for B2B subscription businesses, even for those with annual subscription terms (by the way, ARR is rarely used in B2C subscription businesses).
ARR is frequently adopted by B2B SaaS businesses with multi-year terms and tends to be used in businesses with lower transaction volume and high transaction value. It is also not uncommon for companies that use ARR to also use MRR.
ARR does have one benefit over MRR: ARR aligns well with your GAAP revenue. MRR and monthly revenue can differ significantly in any given month due to different revenue allocations over 28, 29, 30 and 31 day months. Over a one-year term, ARR is generally going to line up much more closely with GAAP revenue over that one-year period.
Is that a compelling reason to use ARR? Not really.
As far as drawbacks in standardizing on ARR over MRR for recurring revenue performance metrics, short agreement terms or billing periods can pose a challenge if you adopt a practice of associating or equating ARR to GAAP revenue. With a short subscription term, which could be due to a one-off agreement or a coterminous add-on service, the ARR is factored up relative to the contracted amount and then can grossly overstate "revenue" relative to reportable GAAP revenue.
Is that a compelling reason to avoid ARR? Not really.
As a subscription business grows and experiments with pricing and packaging, it's common to introduce new contract terms. If, or when, you do and you end up with contracts with term lengths less than a year, MRR is the preferred normalized recurring revenue performance metric.
If ARR has been the standard and common company vernacular for discussing recurring revenue, it may be difficult to change to MRR, at least until the volume of the new "shorter" term contracts is such that the pain of making the change is warranted. Changing communications, culture, measurement and reporting processes from ARR to MRR can consume significant time and energy.
ARR is likely to more effectively define your business. If you walk into a VC meeting with a single slide full of ARR metrics, everyone in the room will know you are an annual subscription company. They likely will infer from ARR that you lean toward the 'enterprise' side of the marketplace.
If the same slide page has MRR metrics, they would need further information to determine if you were B2C or B2B subscription business and to understand your relative price points and typical agreement duration.
Not convinced by the compelling explanations above? Good. Then you have figured it out. It doesn't really matter much. Pick one and stick with it. And if you don't care, play it safe and go with the masses and use MRR.