What is MRR? What is ARR? They sound similar but don’t confuse them, as this could throw your annual budget out of wack! In this article, we’re going to cover MRR vs. ARR, what MRR means by itself, and introduce you to CARR.
In this article
What is MRR?
What is MRR? MRR is defined as the total dollar amount of all subscriptions, contracts, or other recurring revenue that your company has received in a particular period. MRR can be calculated by taking your total annual MRR and dividing it by 12 to get your MRR per month. Since MRR is so important for both investors and internal teams, MRR growth should be regularly reported out in company updates, press releases, earnings calls, or anywhere else you need to state numbers.
What is the MRR formula or how to calculate MRR? The MRR formula is
MRR = ARR – Churned MRR.
What is ARR?
What is ARR? What does ARR mean? Also known as ACV (annual contract value), ARR means the total revenue resulting from signed contracts with customers during a given time span. This metric isn’t limited to just subscriptions; it also includes one-time transactions, as well as amounts that are due for renewal. If you’re looking to include MRR in your calculation, MRR = ARR – MRR refunds.
The ARR formula is MRR (your MRR for the month) + MRR refunds (the MRR you refunded to your customers that month).
What is CARR?
What is CARR? What does CARR stand for?ACAC stands for annual contract amount churn rate, or the percentage of ACV customers who cancel during a given yearly period. For example, if you have an ACV of $100k and 100 customers on your subscription plan total up to $100k MRR, but one year later there are 80 customers remaining with an ACV of $80k total (leaving your MRR at $80k), then your annual contract amount churn rate is 20%.
The CARR formula is as follows:
CARR = MRR/ACV*100%
What is ACV?
ACV is short for annual contract value, or the total amount of MRR that has accumulated in a particular period, resulting from signed contracts with customers. ACV also counts the revenue on one-time transactions and amounts due to renewal during that year.
What is the ACV formula? The ACV formula is MRR (your MRR for the month) + MRR refunds (the MRR you refunded to your customers that month).
Why is calculating MRR, ARR and CARR important?
It’s important that you know what your current MRR growth looks like in order to better forecast your revenue revolving around ARRs. MRR is of great value to your company because MRR can be used as a predictor for growth. MRR can also be used as a tool for forecasting future MRR growth.
What are the advantages and disadvantages of MRR?
Some of MRR’s disadvantages include it doesn’t tell you about refunds, payments due within thirty days, discounts, or deals that could affect MRR, where MRRs can vary greatly between different billing cycles. There are also times when MRRs might not paint an accurate picture of how many new customers joined your business each month; if you offer promotions with free trials or certain tiers that don’t require credit card payment details upfront, then you’ll want to subtract all free trial signups from your total MRR to get a more accurate MRR number. In addition, MRRs can vary greatly between different billing cycles. MRR is not the same as ARR because it does not calculate month-over-month revenue.
ARR vs MRR – what’s the difference?
Another example of MRRs and ARRs being different comes into play when a customer upgrades or downgrades their subscription plan. If a monthly subscriber suddenly decides to switch to an annual subscription, then you’ll need to add back any MRR from that customer’s unused months in order to have a clearer picture of your MRPs each month.
Another consideration is when customers cancel their service; if they come back within 30 days, you can’t add them back onto your MRP for this period unless they’ve been upgraded to a higher plan or you can prove they were unable to access your service. MRR is different from ARR because MRR does not take upgrades and downgrades into account while ARR does. MRRs are less likely to be inflated since MRR only counts customers who have actually paid for service, while ARRs may include customers that haven’t even been billed yet.
MRR vs ACV – what’s the difference?
Another example of MRRs and ACVs being different comes into play when a customer upgrades or downgrades their subscription plan. If a monthly subscriber suddenly decides to switch to an annual subscription, then you’ll need to add back any MRR from that customer’s unused months in order to have a clearer picture of your MRPs each month. MRR and ACV are not the same, because MRR only includes MRRs actually paid for by customers, while ACV also takes into account MRRs that have been refunded.
MRR vs CARR – what’s the difference?
MRR is different from CARR because MRR only includes MRRs that have been paid for by customers. While MRRs are less likely to be inflated since MRR only counts customers who have actually paid, ARRs may include customers that haven’t even been billed yet.
What are MRR’s advantages? MRRs are counted before taxes and discounts are applied, so the MRP is the same as what you will charge a new customer if they sign up today without any promotions or discounts. MRRs can also provide great insight into your business trends – how many active users do you have at any given time? How many people cancel or downgrade? What about upgrades?
CARR vs ARR – what’s the difference?
MRR stands for MRP minus MRRs that have been refunded to customers. You can find MRRs that have been refunded by checking the MRR column on your MRR report. If you see negative numbers in this column, then MRRs have been refunded to your customers and won’t be counted towards your MRPs.
CARR vs ARR – what’s the difference? CARR stands for MRP minus ARRs that have been upgraded or downgraded after being billed. You can find ARRs that have been upgraded or downgraded by checking the ARR column on your MRR report.
B2B SaaS ARR, MRR, and CARR benchmarks
What are some common averages and industry benchmarks for ARR, MRR, and CARR for popular verticals such as SaaS, fitness, education, or social media?
The following MRR and ARR benchmarks come from BuiltWith Research. MRRs and ARRs tend to be lower in the education sector since schools usually don’t need to upgrade their accounts very often, but MRRs and ARRs are usually significantly higher for SaaS providers such as Salesforce or Office 365.
1) $128,707 MRR / $109,878 ARR (B2B SaaS software)
2) $3,847 MRR / $3,132 ARR (B2C fitness app)
3) $5 MRR / $4.5 ARR (social media app targeting younger users)
4) -$6 MRR / -$7.6 ARR (B2C education app)
Average MRR and ARR benchmarks by industry. MRRs are usually higher than ARRs since MRRs only include customers who have paid for their subscriptions while ARRs include anyone who has upgraded or downgraded after being billed. MRRs tend to be the highest in B2B SaaS software like Salesforce, followed by B2C SaaS like Trello.
How to increase our MRR, ARR, and CARR?
So, you know what is MRR, ARR, and CARR – now you want to increase these metrics! Let’s take a look at each one individually!
Strategies to increase MRR:
1) Offer promotional discounts and coupons – MRRs count MRPs minus MRR discounts, so one way to increase MRRs is by offering promotions and discounts. You could offer a discount for the first month of service or run a free trial promotion that gives customers a 3-day, 7-day, or 30-day free trial period. Make sure you’re only counting MRRs and not ARRs when measuring performance!
2) Improve retention rates – if customers are satisfied with their current subscription plan then they will be less likely to cancel their subscriptions. If customers do cancel, it’ll be easier to win them back as referrals since they know about your product already! Customers tend to stay on longer if they feel like they get a lot of value from your product, so make sure you’re not only focusing on MRR but also customer retention rates!
3) Increase MRP – MRP is based on what a new customer would pay for your service. If you’re going to raise MRPs then you definitely want to do this while customers are still on their free trial period. Be transparent about changes in MRP and provide customers with plenty of warning before increasing MRPs. You could even offer a grandfathering period that allows customers who have been using the product at a certain rate for X amount of time to continue using it at the old rate after the increase goes into effect.
Strategies to increase ARRs
1) Expand feature set or add new features – if customers feel like they don’t get enough value from your product, then they may downgrade and cancel their accounts. This is something to keep in mind as you’re building new features and trying to improve MRR! If you want to increase the number of ARRs, you’ll need to either build more features or come up with a new feature that makes customers upgrade.
2) Make sure all paid users are added as ARRs – let’s say there’s one customer on your MRR report who’s been paying $10 MRP for the past 3 years but isn’t included as an ARR. You definitely want to add them as an ARR so that you can count this MRP towards not only MRR but also towards ARR!
3) Automate upgrades & downgrades – MRR discounts are only counted after the MRR gets upgraded or downgraded. If MRRs consistently stay at one plan level, then it’ll be harder to track MRP trends and improve MRR. Instead, you should automate these changes so that MRPs are always up-to-date. Customer success software can help you with this by offering automation templates that can automatically upgrade or downgrade customers when certain criteria are met.
Strategies to increase CARRs
1) Make sure all ARRs are included as CARRs – if there’s one customer on your MRR report who has an active subscription but isn’t being counted as a CARR, then this will have a negative impact on your MRR! Make sure that MRRs are always up-to-date by adding all ARRs to the CARRs category.
2) Achieve product/market fit – if you’re still in the early stages of business then it’s likely that not all MRPs and MRRs will be counted towards CARR. Since you don’t have many customers yet, some MRP won’t turn into MRRs for a while so they won’t be counted as CARR. The same goes for MRRs: if none of your customers cancel their subscriptions before their next billing cycle starts then you’ll only count them as 1MRR even though they’ve paid $10 MRP for 12 months. This is an example of why product/market fit is so important: you need to find a good balance between MRR and MRP in order to maximize your CARR.
3) Attract new customers – let’s say you’re currently at $100K MRR and plan on growing MRR to $1M MRR by the end of this year. You’ll most likely have to increase MRP or add more features for this goal, which will negatively impact ARRs. Instead, you could focus on attracting new customers who don’t know about your product yet so that they can be added as ARRs instead! If you do implement these changes then it’s crucial that all MRRs and MRPs are included with CARRs.
Final thoughts on MRR, ARR, and CARR
Achieving high MRRs & MRPs is important for business, but MRR and MRP alone aren’t enough to give a complete picture of your product’s health. MRRs are dependent on ARRs while MRPs are dependent on MRRs. A big part of managing your MRR is keeping track of both MRR & MRP growth while making sure all ARRs are included in the CARRs category. This will help you track revenue accurately so that you can make smart decisions about growing your company!