Three abbreviations. They appear in every article about subscription businesses and are used so often that it seems like everyone understands them. In practice, that's almost never true.
MRR, Monthly Recurring Revenue
MRR is the predictable revenue from active subscriptions, expressed per month. The crucial word is predictable. One-off sales, installation fees, or usage surcharges don't belong here. Only what structurally recurs.
Basic formula
MRR = Σ (monthly value of each active subscription)
Example: A cleaning company has 60 weekly contracts at €120 (= €520/mo) and 20 monthly contracts at €280. MRR = (60 × 520) + (20 × 280) = €36,800
Three pitfalls when calculating MRR
1. Including one-off items
Setup fees, installation costs and one-off consulting hours don't belong in MRR. They're real revenue, but not recurring. Book them separately as "one-time revenue".
2. Miscounting annual contracts
An annual contract for €1,200 is €100 MRR per month for 12 months, not €1,200 in the month you invoice. Otherwise you'll see extremely volatile MRR figures.
3. Forgetting VAT and discounts
MRR is always net excluding VAT. And applied discounts count: a €99 subscription with 20% discount is €79.20 MRR, not €99.
ARR, Annual Recurring Revenue
Formula
ARR = MRR × 12
Example: €42,300 MRR → ARR = €507,600 annualised
MRR
Operational view
For monthly decisions: price changes, churn actions, sales targets. This number changes daily.
ARR
Strategic view
For annual planning, investor presentations, bank and accountant conversations. This number is on an annual basis.
Not a forecast
ARR is what you currently have in annual revenue, not what you'll invoice this year. If you grow mid-year, that shows up in a later ARR, not in a projection.
Churn rate, two ways, two stories
Customer churn
Customer churn = customers cancelled ÷ customers at start of month × 100
Example: 8 cancellations / 400 customers = 2.0% customer churn
Revenue churn (MRR churn)
Revenue churn = MRR lost ÷ MRR at start of month × 100
Example: €1,080 lost / €36,000 MRR = 3.0% revenue churn
"Customer churn tells you how many customers you lose. Revenue churn tells you how bad that was."
What is a healthy churn?
Monthly churn compounds
3% monthly churn sounds small, but means ~30% annual churn. Every year you must replace a third of your customer base just to stay level.
How these three connect
Monthly movement
End MRR = Start MRR + New MRR − Churned MRR
Example: €40,000 start + €3,500 new − €1,200 churn = €42,300 end MRR (5.75% net growth)
If your churn is larger than your new MRR, you're shrinking, regardless of how many new customers you sign. That's why churn is often more important than acquisition: every euro that leaks from a leaky bucket must be earned again.
MRR, ARR and churn, automatically calculated from Exact Online.
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