Founder explainer · 3 min read
ARR vs MRR: what counts as recurring revenue, with examples
MRR (monthly recurring revenue) is the subscription revenue a business can expect every month from its current customers. ARR (annual recurring revenue) is the same figure on a yearly basis, usually MRR × 12. Both count only recurring revenue, so they are narrower than total revenue, which also includes one-off fees and services.
By the StartupReader editorial desk · Updated 2026-10-28 · Worked examples are illustrative
ARR vs MRR
- ARR for a monthly subscription business
- MRR × 12
- parts of net new MRR: new, expansion, contraction, churn
- 4
- ARR in our worked example (₹12.6 lakh MRR × 12)
- ₹1.51 Cr
Three numbers that are often confused
MRR and ARR are operating metrics: snapshots of the recurring revenue running through the business at a point in time. Revenue is an accounting figure: everything recognised in the accounts over a period, recurring or not, under the applicable accounting standards.
| Measure | What it includes | Mainly used for |
|---|---|---|
| MRR | Recurring fees from active customers, normalised to one month | Tracking month-to-month momentum |
| ARR | The same recurring fees on a yearly basis | Annual contracts, investor updates, valuation multiples |
| Revenue | Everything recognised in the accounts, recurring or one-off | Financial statements, tax and audit |
What counts as recurring
Normalise every contract to a monthly amount. A customer on a ₹1,20,000 annual plan adds ₹10,000 to MRR every month, not ₹1,20,000 in the month they pay. Count what customers actually pay after discounts.
- Include: subscription and licence fees on active contracts, and recurring add-ons such as extra seats or modules.
- Exclude: one-time setup, implementation and onboarding fees.
- Exclude: consulting, custom development and other professional services.
- Exclude: hardware, free trials, unpaid pilots, and GST or other taxes collected.
- Usage-based fees: treatment varies. Many companies count a committed minimum and report variable usage separately; whatever you choose, say so.
Run-rate ARR vs contracted ARR
Run-rate ARR annualises what is being billed now: current MRR × 12, covering customers who are live and paying. Be careful with the looser phrase "revenue run-rate", which some companies use for a single month's total revenue × 12, including one-off fees or a seasonal peak. That is not ARR.
Contracted ARR (sometimes CARR) adds recurring contracts that are signed but not yet live, and usually subtracts customers who have given notice to leave. If live ARR is ₹3 crore, ₹60 lakh of signed contracts start next quarter and a ₹20 lakh customer has given notice, contracted ARR is 3 + 0.6 − 0.2 = ₹3.4 crore. Companies with long onboarding often report both, and investors will ask which one a deck shows.
Net new MRR and its parts
Net new MRR = new MRR + expansion MRR − contraction MRR − churned MRR. Tracking the four parts separately shows where growth comes from and where it leaks.
- New MRR: from customers who started paying this month.
- Expansion MRR: increases from existing customers, such as upgrades, extra seats or add-ons.
- Contraction MRR: decreases from customers who stay but pay less, such as downgrades or fewer seats.
- Churned MRR: everything lost from customers who cancelled.
Worked example: three months of MRR
An illustrative software company starts with ₹10 lakh of MRR. The table below shows each month's movements in ₹ lakh.
Closing MRR in month 3 is ₹12.6 lakh, so ARR is 12.6 × 12 = ₹151.2 lakh, about ₹1.51 crore. Month 3 shows why the parts matter: new sales held up, but one large cancellation (₹1.1 lakh of churned MRR) wiped out almost all the growth. If the company also billed ₹3 lakh of one-off implementation fees that month, those would count towards revenue but not towards MRR or ARR.
| ₹ lakh | Month 1 | Month 2 | Month 3 |
|---|---|---|---|
| Opening MRR | 10.0 | 11.4 | 12.4 |
| + New | 1.5 | 1.2 | 1.0 |
| + Expansion | 0.5 | 0.6 | 0.4 |
| − Contraction | 0.2 | 0.3 | 0.1 |
| − Churned | 0.4 | 0.5 | 1.1 |
| = Net new MRR | 1.4 | 1.0 | 0.2 |
| Closing MRR | 11.4 | 12.4 | 12.6 |
Common mistakes
- Calling a single month's total revenue × 12 "ARR" when it includes one-off fees.
- Counting an annual contract's full value as MRR in the month it is invoiced.
- Mixing signed-but-not-live contracts into ARR without labelling it contracted ARR.
- Reporting only net new MRR, which hides rising churn behind strong new sales.
Questions founders ask
Is ARR just MRR multiplied by 12?
For most subscription businesses, yes. Companies that sell annual or multi-year contracts often calculate ARR directly from the annualised value of active contracts, which gives the same answer if MRR has been normalised correctly.
Should one-time setup fees be included in ARR?
No. They are revenue, but they do not recur. Report them separately so investors can see the recurring base on its own.
Is ARR the same as annual revenue?
No. ARR is a snapshot of recurring revenue at a point in time; annual revenue is what was recognised over the past year. A fast-growing company usually has ARR well above last year's revenue.
What is net revenue retention?
It compares what a group of existing customers pays now with what the same customers paid a year earlier, after expansion, contraction and churn. Above 100% means existing customers are growing in value before any new sales.
Should early-stage startups report MRR or ARR?
Many report MRR while revenue is small and changes quickly, and switch to ARR as contracts become annual and the business scales. Use whichever matches how you bill, and be consistent.
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Written by the StartupReader editorial desk with AI assistance, from standard definitions and the examples worked through above; updated 2026-10-28. Rules on tax and foreign investment change, so check the official sources or an adviser before acting. Spotted something wrong? Tell us.