01 / UNDERSTAND THE CONCEPT
A recurring revenue run rate, not a forecast.
Monthly recurring revenue standardizes recurring subscriptions into a monthly amount. Annual recurring revenue multiplies that monthly run rate by twelve. These measures help compare subscription scale independently of billing cadence.
ARR is not necessarily recognized annual revenue, cash collected or next year’s forecast. Exclude one-off services and avoid treating contracted, booked and live recurring revenue as interchangeable.
02 / THE MATHEMATICS
The formula, made clear.
MRR = active customers × monthly revenue per customer; ARR = MRR × 12
- Active customers
- The paying customer base included in the recurring-revenue definition.
- Average monthly revenue
- Normalized subscription revenue per active customer.
03 / A WORKED EXAMPLE
Put the numbers in context.
500 customers at $200.00 in monthly recurring revenue each give $100,000.00 MRR and $1.2M ARR.
| Input | Example value |
|---|---|
| Paying customers | 500 customers |
| Monthly revenue per customer | $200.00 |
| Annual recurring revenue | $1,200,000.00 |
MODEL BOUNDARIES
What this calculation assumes
A single average customer price, constant through the annualization. No future growth, churn or one-time revenue.
FROM UNDERSTANDING TO ACTION
What to consider next.
Segment revenue by cohort or product, and model retention and growth separately from the current run rate.
How we approach financial models →