MRR Formula: Monthly Recurring Revenue Explained

Monthly recurring revenue (MRR) is the predictable subscription or retainer income your business can expect each month, normalized to a monthly amount. The basic MRR formula is number of paying customers x average monthly revenue per customer, or simply the sum of every active customer's monthly recurring fee. One-time charges are excluded, and annual plans are divided by 12.

MRR is the headline metric for SaaS and subscription businesses, but it is just as useful for service firms with retainers, maintenance plans or memberships. It shows at a glance whether your recurring base is growing, and breaking it into components shows why. This guide covers the formulas, a worked month-by-month example, how to handle annual plans and discounts, and the mistakes that inflate MRR.

The MRR formula

MRR = sum of monthly recurring fees from all active customers

or, as a shortcut:

MRR = number of paying customers x ARPA (average revenue per account per month)

Include in MRR	Exclude from MRR
Monthly subscription and retainer fees	One-time setup or onboarding fees
Annual or quarterly plans, divided into monthly amounts	One-off projects and ad-hoc hourly work
Recurring add-ons and extra seats	Hardware, shipping, reimbursed expenses
Committed minimums on usage plans	Variable usage overages (or track separately)
Net of ongoing recurring discounts	Sales tax and VAT collected

MRR components: new, expansion, contraction and churn

Total MRR hides what is happening underneath. Break the change in MRR into five parts:

Component	Meaning
New MRR	Recurring revenue from customers who started this month
Expansion MRR	Increases from existing customers: upgrades, add-ons, extra seats, price increases
Contraction MRR	Decreases from existing customers who downgrade but stay
Churned MRR	Recurring revenue lost from customers who cancelled
Reactivation MRR	Former customers who come back

Net new MRR = new + expansion + reactivation - contraction - churned

Ending MRR = starting MRR + net new MRR

Worked example: three months of MRR

An illustrative example. A small web agency sells monthly website care plans at $150, $300 and $600, and some clients pay annually.

	August	September	October
Starting MRR	$12,000	$12,900	$13,350
New MRR	+$1,200	+$900	+$1,500
Expansion MRR	+$300	+$450	+$300
Contraction MRR	-$150	$0	-$300
Churned MRR	-$450	-$900	-$300
Net new MRR	+$900	+$450	+$1,200
Ending MRR	$12,900	$13,350	$14,550

September looks like a slow month for sales, but the real story is churn: $900 lost, twice August's figure. That is the month to call departing clients and ask why. The agency's monthly gross revenue churn in September was $900 / $12,900, or about 7%, which is worth investigating; our guide to churn rate explains the formulas and fixes.

Handling an annual plan in the example

In October, one new client prepays $3,600 for a year of the $300 plan. Only $300 goes into October's new MRR, not $3,600. Cash in the bank rises by $3,600, but for accounting most of that payment is deferred revenue that is recognized month by month as the service is delivered. Our guides to deferred vs accrued revenue and revenue recognition under ASC 606 explain the accounting.

MRR vs ARR vs revenue vs cash

Measure	What it shows	Annual plan of $3,600 paid in October
MRR	Current monthly recurring run rate	+$300 per month
ARR	MRR x 12	+$3,600
Recognized revenue	Earned under accounting rules	$300 per month as service is delivered
Cash collected	Money received	$3,600 in October

Keeping these separate prevents a common mistake: treating a big upfront payment as a big growth month. Cash planning still matters, of course; upfront annual payments are excellent for your cash flow forecast.

Step by step: tracking MRR in a spreadsheet

1. List every active recurring customer, one row each.
2. Record the plan, billing frequency and contract amount.
3. Calculate the monthly equivalent: annual / 12, quarterly / 3.
4. Subtract any ongoing recurring discount (ignore one-off first-month discounts or track them consistently).
5. At month end, tag each change: new, expansion, contraction, churned, reactivated.
6. Sum the columns to get starting MRR, each component and ending MRR.
7. Chart ending MRR and net new MRR monthly.

If you bill through a subscription platform, it may calculate MRR for you, but check how it treats discounts, trials and failed payments.

Related metrics built on MRR

• ARPA: MRR / paying customers. Rising ARPA can mean successful upsells or moving upmarket.
• MRR growth rate: (ending MRR - starting MRR) / starting MRR.
• Revenue churn and net revenue retention: how much of last month's MRR you kept, including expansion.
• Customer lifetime value: ARPA x gross margin / churn rate; see customer lifetime value.
• CAC payback: months of gross-margin MRR needed to recover the cost of acquiring a customer; see customer acquisition cost.

How discounts, trials, pauses and proration affect MRR

Edge cases are where MRR figures go wrong. Pick a rule for each and write it down.

Situation	Common treatment	Example
Permanent discount (e.g. 10% off for life)	Count the discounted amount	$300 plan at 10% off = $270 MRR
First-month promo (e.g. first month half price)	Many count the full plan price from the start; others count actual billing. Be consistent	$300 plan, $150 first month: $300 or $150 MRR depending on your rule
Free trial	Exclude until the first paid charge	$0 MRR during a 14-day trial
Paused subscription	Remove from MRR while paused; add back as reactivation	Client pauses for 2 months: -$300, then +$300
Mid-month upgrade	Count the new full monthly rate as expansion; prorated charges are a billing detail	$300 to $600 plan: +$300 expansion MRR
Price increase for existing clients	Count as expansion MRR when it takes effect	40 clients x $20 increase = +$800

The proration rule trips people up most. When a client upgrades on the 15th, your invoice might charge half a month of the difference, but MRR reflects the new monthly run rate immediately. The prorated invoice amount and the MRR change are two different numbers, and both are correct for their purpose.

Why MRR matters beyond the spreadsheet

For a small business owner, MRR answers practical questions:

• Can I afford to hire? If recurring revenue alone covers a new salary plus your fixed costs, the hire is far less risky.
• How much can I spend on marketing? Knowing how much MRR each new client adds, and how long they stay, tells you what a new client is worth.
• What is my business worth? Buyers and lenders look closely at recurring revenue and its trend. A business with growing MRR and low churn usually earns a better valuation than one with the same revenue from one-off projects.
• Is a price increase working? Expansion MRR from the increase versus churned MRR from clients who left shows the net effect.

Review MRR monthly, on the same day, alongside churn and cash in the bank. Over a few months, the components table becomes the clearest picture you have of where your business is heading.

Common MRR mistakes

• Counting setup fees. They do not recur; including them inflates growth.
• Booking annual payments as one month's MRR. Always normalize.
• Counting free trials. Only paying customers count.
• Ignoring failed payments. A customer whose payment fails and is never recovered has churned, even if their account is still open.
• Including sales tax. Tax collected belongs to the government, not your revenue.
• Counting signed but not started contracts. Some businesses track this as "committed MRR" separately.
• Treating variable usage as fixed. If you bill by usage, see usage-based billing invoices and decide a consistent rule.

MRR benchmarks: what growth looks like

There is no universal "good" MRR, because it depends on your prices, market and stage. What matters is the direction and the mix. A healthy recurring business usually shows ending MRR rising most months, expansion MRR that covers a meaningful share of churned MRR, and new MRR that is not shrinking. If net new MRR is positive only because of new sales, while churn quietly grows, growth will stall as soon as sales slow. Track the ratio of new plus expansion MRR to churned plus contraction MRR; when it stays well above 1, the base is compounding.

In the worked example above, August's ratio is ($1,200 + $300) / ($150 + $450) = 2.5, September's is $1,350 / $900 = 1.5, and October's is $1,800 / $600 = 3.0. The September dip is the same warning the churn line gave, seen from a different angle. Plotting this ratio monthly takes two minutes once your spreadsheet is set up, and it flags trouble before ending MRR actually falls.

MRR for service businesses and freelancers

You do not need software to have MRR. A bookkeeper with 15 clients on $400 monthly packages has $6,000 MRR. A cleaning company with 40 weekly contracts priced monthly, an IT provider with managed service plans, or an SEO freelancer with retainers all qualify. Converting one-off clients to retainers is one of the most effective ways to stabilize income, and buyers typically value recurring revenue more highly if you ever sell the business.

Recurring income also needs reliable recurring billing. Invoice the same day each month, state the service period on every invoice, and prorate fairly when clients join or upgrade mid-month; see our guides on recurring invoices and prorated invoices. For each monthly bill, you can create a professional invoice with our free invoice generator, no sign-up needed, and download it as a PDF in under a minute.