Recurring revenue metrics form the backbone of every SaaS company’s financial story. Whether you are presenting to your board, raising your next round of funding, or simply trying to understand the health of your business, ARR, MRR, and churn are the metrics that matter most. Getting them right is not optional—it is essential.
This guide walks through how to calculate each metric correctly, the common pitfalls that lead to inaccurate reporting, and the frameworks finance teams use to turn these numbers into actionable insights.
Understanding MRR: The Foundation
Monthly Recurring Revenue represents the predictable revenue a company expects to receive every month from active subscriptions. It excludes one-time fees, professional services, and variable usage charges unless those charges are contractually committed.
How to Calculate MRR
The simplest formula is:
MRR = Number of Active Subscribers x Average Revenue Per Account (ARPA)
However, most SaaS companies have multiple pricing tiers, add-ons, and discount structures. A more precise approach breaks MRR into its components:
- New MRR: Revenue from brand-new customers acquired during the period.
- Expansion MRR: Additional revenue from existing customers through upsells, cross-sells, or seat additions.
- Contraction MRR: Revenue lost from existing customers who downgraded their plans.
- Churned MRR: Revenue lost from customers who cancelled entirely.
The net change in MRR for any month is:
Net New MRR = New MRR + Expansion MRR - Contraction MRR - Churned MRR
Common MRR Mistakes
Finance teams frequently run into trouble by including non-recurring items in MRR calculations. Implementation fees, one-time training charges, and overage billing should be tracked separately. Another common mistake is counting annual contracts at their full value in a single month rather than spreading them evenly across twelve months.
If a customer signs a $120,000 annual contract, that is $10,000 in MRR—not $120,000 in the month the deal closes. This distinction matters enormously for accurate trend analysis.
ARR: The Annualized View
Annual Recurring Revenue is simply MRR multiplied by twelve. While that sounds straightforward, ARR serves a different purpose than MRR. It is the metric investors and boards use to gauge company scale and growth trajectory.
ARR = MRR x 12
ARR is most useful when:
- Communicating company size to external stakeholders
- Setting annual targets and compensation plans
- Benchmarking against industry peers
- Calculating valuation multiples (EV/ARR is the standard SaaS valuation metric)
When ARR Gets Complicated
Multi-year contracts with built-in price escalators require careful treatment. If a customer signs a three-year deal at $100K, $110K, and $120K for years one through three, the ARR should reflect the current-year value, not an average. This keeps your ARR aligned with the revenue you are actually recognizing.
Similarly, usage-based components that exceed committed minimums should generally be excluded from ARR unless your business has demonstrated consistent and predictable overage patterns.
Churn Analysis: Where the Real Insight Lives
Churn is the silent killer of SaaS businesses. Even small monthly churn rates compound into devastating annual losses. A company with 2% monthly logo churn will lose roughly 21.5% of its customer base over a year.
Types of Churn
There are two primary churn metrics, and you need both:
Logo Churn Rate measures the percentage of customers lost:
Logo Churn Rate = (Customers Lost During Period / Customers at Start of Period) x 100
Revenue Churn Rate measures the percentage of MRR lost:
Gross Revenue Churn Rate = (Churned MRR + Contraction MRR) / Starting MRR x 100
Revenue churn is generally more informative than logo churn because it accounts for the economic impact. Losing ten $50/month customers is very different from losing one $5,000/month enterprise account, even though the logo count is the same in the first scenario.
Net Revenue Churn vs. Gross Revenue Churn
This distinction is critical. Gross revenue churn only looks at losses. Net revenue churn (or net revenue retention, expressed as a percentage above or below 100%) factors in expansion revenue from the surviving customer base.
Net Revenue Churn = (Churned MRR + Contraction MRR - Expansion MRR) / Starting MRR x 100
Top-performing SaaS companies achieve negative net revenue churn, meaning expansion from existing customers more than offsets losses. This creates a powerful compounding effect where even without acquiring new customers, revenue grows.
A Practical Churn Analysis Framework
Step 1: Segment Your Churn
Aggregate churn numbers hide more than they reveal. Break churn down by:
- Customer segment: SMB, mid-market, and enterprise customers churn for different reasons and at different rates.
- Cohort vintage: Are customers acquired in Q1 churning faster than those from Q3? This signals changes in customer quality or onboarding effectiveness.
- Product line or plan: If your premium tier has lower churn, that tells you something about value delivery.
- Tenure: New customers (first 90 days) typically churn at much higher rates than established accounts.
Step 2: Calculate Cohort-Level Retention Curves
Plot the retention rate of each monthly or quarterly cohort over time. Healthy SaaS businesses show retention curves that flatten—meaning churn is concentrated in early months and drops significantly once customers reach a certain tenure. If your curves never flatten, you have a product-market fit issue, not just a churn problem.
Step 3: Identify Leading Indicators
Churn is a lagging indicator. By the time a customer cancels, the decision was likely made weeks or months earlier. Work with your product and customer success teams to identify leading indicators such as:
- Declining login frequency
- Reduced feature adoption
- Support ticket patterns
- NPS or CSAT score drops
- Failure to complete onboarding milestones
Step 4: Quantify the Revenue Impact
Translate churn patterns into dollar terms for executive audiences. A board presentation that says “churn increased from 1.5% to 2.0% monthly” is less impactful than “at current growth rates, this churn increase will cost us $2.4M in ARR over the next twelve months.”
Building Your Recurring Revenue Dashboard
Every SaaS finance team should maintain a dashboard that tracks these metrics in real time:
- MRR waterfall: New, expansion, contraction, and churned MRR visualized monthly.
- ARR trend line: Trailing twelve-month ARR with a forward projection based on current net new MRR trends.
- Churn rates: Both logo and revenue churn, segmented by customer tier.
- Cohort retention matrix: A heat map showing retention rates by cohort and tenure month.
- Quick ratio: (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR). A ratio above 4 indicates healthy, efficient growth.
Key Takeaways
Accurate recurring revenue and churn metrics require discipline in data hygiene, clear definitions agreed upon across the organization, and consistent measurement methodology. The companies that get these fundamentals right build a reliable financial foundation for every other decision—from hiring plans to fundraising to product investment prioritization.
Start with clean MRR calculations, build out your churn segmentation, and invest in cohort-level analysis. The insights you uncover will pay dividends far beyond the finance team.