If you could only track one number in a subscription business, this would be it. Not the month's revenue, which mixes recurring and one-off, but the portion that will come back next month with no action from you.
Its strength is also its trap: it can be calculated several ways, and the most flattering is rarely the most useful.
Definition
MRR, monthly recurring revenue, is the sum of subscription revenue normalised to a monthly basis, excluding one-off items.
The normalising is what matters. A €480 annual subscription counts as €40 of MRR every month, not €480 in the month it was collected. Without that rule your chart becomes an unreadable run of spikes.
What never belongs in MRR: one-off services, setup fees, refunds, hardware resale. Including them inflates the figure and destroys its only quality, which is being predictable.
Breaking MRR down so it does something
A rising headline MRR can hide a haemorrhage. The monthly breakdown is what makes the metric usable:
| Component | What it measures |
|---|---|
| New MRR | This month's new customers |
| Expansion MRR | Upgrades, Upsell |
| Contraction MRR | Downgrades |
| Churned MRR | Cancellations, Churn rate |
These four components are read monthly; projected over twelve months they give ARR (annual recurring revenue). The four together give the month's net movement. Two companies with identical net growth can be in opposite situations: one gains a hundred and loses ten, the other gains a thousand and loses nine hundred and ten. Only the breakdown shows it.
The number that really counts
The most revealing ratio is net revenue retention: expansion MRR minus contraction and churned MRR, over starting MRR.
Above 100 percent, your existing customers pay more this month than last, with no new customers at all. That is the most comfortable position there is, because growth no longer depends entirely on acquisition.
Frequently asked questions
Should trials count towards MRR?
No. A free trial is not revenue, and including it produces a chart that drops at the end of every cohort. Count a subscription from the first payment actually collected.
What about discounts?
MRR is always counted net of discount, on what is actually billed. A €100 customer on a 30 percent discount weighs €70. Counting the list price is lying to yourself about your own Gross margin.
MRR or revenue?
Both, but separately. Revenue tells you what came in, MRR tells you what will come in next month. Conflating them is the most common cause of cash-flow surprises.
At what size should I start tracking it?
From the first subscriber. The calculation takes five minutes a month and the habit is worth more than the precision: what counts is seeing the trend before it shows up in your bank account.