I guess there is no exaggeration in saying that “SaaS is all about MRR.”
MRR is the abbreviation for “Monthly Recurring Revenue,” which presents the revenue recurring every month. ARR stands for “Annual Recurring Revenue,” which is slightly different from MRR because it represents the “annual” recurring revenue.
In other words, assuming that the churn rate is zero,
- if the present MRR is 1 million USD, it will lead to 1 million USD in revenue next month,
- if the present ARR is 1 million USD, it will lead to 1 million USD in revenue next year.
So which should you use for your SaaS metrics, MRR or ARR?
To relate MRR with ARR, by simply multiplying the MRR by 12, you can relate the MRR to the ARR. However, in a rapid growing startup, the MRR of its first month and its last month will be quite different, which will lead to difference in ARR value, depending on the month of the MRR you use to make the calculation. Sure, it depends on whether you are feeling confident, or slightly careful on your growth. The churn rate also effects the MRR heavily, since if the churn is larger than your new customer, the last month MRR will be smaller than the first month MRR. This is a nightmare scenario for a growing SaaS startup.
According to SaaSOPTICS,
- you should use ARR to MRR, if the contract period is less than 1 year, and mostly to business clients(not consumers)
- it is rare to use ARR to consumer services, because they tend to churn easier than business clients
- it is easier to predict revenue by using ARR to MRR, since MRR tends to give you a discount by starting the contract in the middle of the month, therefore leading to fluctuation in its value
In my opinion, the contract period is not much of a big issue, and you just have to align what metrics you are using, just to align the interests when you are having conversation with your employees and investors.