SaaS Recurring Revenue Metrics- Getting a pulse on your SaaS Business Growth
MRR vs ARR : Which is a better metric to focus on?
Recurring revenue is the fundamental business model driving a SaaS business.
Deciding between monthly recurring revenue (MRR) and annual recurring revenue (ARR) is an important strategic choice for any SaaS business. While both are valuable metrics, there are a few key differences to consider:
MRR - Measures total recurring subscription revenue within a month. Better for early stage SaaS as it provides greater visibility into near-term performance. Fluctuations are more apparent month-to-month so this metric is ideal for businesses with a high volume of monthly transactions or frequent pricing changes
ARR - Annualizes recurring revenue so you can forecast long-term growth. Smooths out monthly fluctuations. Better for mature SaaS businesses with larger contracts. Well suited for SaaS business that works with multi-year agreements.
Most SaaS businesses track both MRR and ARR over time. However, I generally recommend focusing more on MRR in the early startup stages since month-to-month visibility is critical. ARR becomes more important later to evaluate sustainable growth. Drawback of tracking ARR alone will be that fluctuations in revenue will not be immediately visible to executive management & corrective action can be delayed.
MRR is also a better metric for benchmarking SaaS key performance indicators like customer lifetime value (LTV) relative to customer acquisition cost (CAC). ARR metrics can get skewed by one large contract versus ongoing growth.
The bottom line - MRR and ARR serve different purposes. Know your goals and what insights you want from each metric. Track both consistently. As the business scales, ARR may become the priority for long-term forecasting and performance. But maintain a close eye on MRR too. MRR provides agility and real-time insights, while ARR offers stability and long-term planning.
Ultimately, the choice between MRR and ARR is not about one being better than the other but about using them strategically to drive your SaaS success.
How do you balance MRR and ARR tracking in your business?