How to calculate ARR
ARR = MRR x 12
Annual recurring revenue is the yearly value of the subscription revenue you can expect to repeat. The hard part is not the multiplication, it is deciding what counts:
- Include: subscription fees, committed minimum usage, recurring add-ons.
- Exclude: implementation and onboarding fees, consulting and training, one-off purchases, and usage that is not contractually committed.
- Normalize: a three-year, $360,000 contract is $120,000 of ARR, or $10,000 of MRR, regardless of when the invoice is paid.
How to calculate MRR
Ending MRR = starting MRR + new MRR + expansion MRR - contraction MRR - churned MRR
Tracking the five movements separately is what turns MRR from a vanity number into a diagnostic. In the example above, $9,000 of new MRR plus $3,000 of expansion adds $12,000, but $3,000 is lost to downgrades and cancellations, so net new MRR is $9,000 and the month grew 9 percent.
| MRR movement | What it is | What drives it |
|---|
| New MRR | Revenue from customers who started this month | Demand generation, sales capacity, conversion rate |
| Expansion MRR | Upgrades, extra seats, add-ons | Product value, packaging, account management |
| Contraction MRR | Downgrades that do not cancel | Over-selling, seat cuts, budget pressure |
| Churned MRR | Revenue from customers who cancelled | ICP fit, onboarding, competition |
ARR vs MRR
| MRR | ARR |
|---|
| Time frame | Monthly | Annual |
| Best for | Monthly plans, self-serve and SMB SaaS | Annual or multi-year contracts, mid-market and enterprise |
| Used to | Spot short-term changes in growth and churn | Report scale to boards and investors, plan the year |
| Formula | Sum of normalized monthly subscription value | MRR x 12 |
Most companies track both: MRR movements every month for operating decisions, and ARR as the headline for planning and fundraising.
The SaaS quick ratio
SaaS quick ratio = (new MRR + expansion MRR) / (contraction MRR + churned MRR)
The quick ratio, commonly attributed to investor Mamoon Hamid, shows how efficiently a company grows: how many dollars it adds for every dollar it loses. Hamid described 4 as the level he wanted to see. A ratio below 1 means the business is shrinking.
Read it alongside company size. A young company with little revenue to lose can post a quick ratio of 10 without being efficient, while a scaled company at 3 with low churn can be in excellent shape. Pair it with churn and net revenue retention for the full picture.
ARR and MRR FAQ
How do you calculate ARR?
ARR, annual recurring revenue, is your monthly recurring revenue multiplied by 12. ARR = MRR x 12. Count only recurring subscription revenue. Leave out one-time setup fees, professional services and usage that is not contractually committed.
How do you calculate MRR?
Add up the normalized monthly subscription value of every active customer. A customer on a $12,000 annual contract contributes $1,000 to MRR, not $12,000 in the month they pay. To track movement, ending MRR = starting MRR + new MRR + expansion MRR - contraction MRR - churned MRR.
What is the difference between ARR and MRR?
They measure the same recurring revenue over different time frames. MRR is the monthly figure and is better for tracking short-term movement in self-serve and SMB businesses. ARR is the annualized figure and is the standard headline number for companies selling annual or multi-year contracts, and for investor reporting.
What is net new MRR?
Net new MRR is the change in MRR over a month: new MRR from new customers plus expansion MRR from existing customers, minus contraction and churned MRR. It shows whether the recurring revenue base grew or shrank, and why.
What is the SaaS quick ratio?
The SaaS quick ratio compares revenue added with revenue lost: (new MRR + expansion MRR) / (contraction MRR + churned MRR). The metric is commonly attributed to investor Mamoon Hamid, who described 4 as the level he wanted to see. Below 1 means the business is shrinking. Very young companies often post high ratios simply because they have little revenue to lose.
Should ARR include one-time fees or services revenue?
No. ARR is meant to show predictable, repeating revenue. Implementation fees, consulting, training and one-off purchases should be reported separately. Including them inflates ARR and makes growth look more durable than it is, which diligence teams will spot.
Want MRR to grow faster?
Share your MRR movements. I will tell you whether the bigger opportunity is new business, expansion or retention, and what I would test first.