ARR and MRR for SaaS startups

MRR and ARR measure the income that repeats. A software-as-a-service (SaaS) company, which rents out software for a regular fee, expects customers to pay again next month or next year. MRR adds up the monthly value of all active subscriptions. ARR does the same on a yearly basis.

If a company has 200 customers paying ₹25,000 a month, its MRR is ₹50 lakh and its ARR is ₹6 crore. Companies that sell yearly contracts often quote ARR, while those with monthly plans, usually smaller ones, often quote MRR. The idea is the same: a clean figure showing how much dependable revenue the business has right now.

Because it is easier to predict. A company that sells one-off projects has to find new buyers every month. A company with recurring revenue starts each month with most of its income already in place, as long as customers stay. This makes planning easier and lowers risk, so investors usually value recurring revenue at a higher multiple than one-off revenue.

The multiple is how investors turn revenue into a company value. A SaaS firm may be valued at several times its ARR, depending on growth, margins and retention. ARR is therefore a basis for valuation as well as a measure of size, which is why founders announce it when they raise funds.

Count only revenue that is both recurring and contracted. A subscription fee counts. A one-time set-up fee, a consulting project, a hardware sale or a refund does not. Usage charges that vary every month, such as per-message fees, are a grey area: some companies include an average, others keep them separate, and a careful company says which it does.

Discounts and free periods matter too. If a customer is on a 50% discount for three months, counting the full price overstates MRR. Taxes like GST should be left out, because the company passes them on to the government. Annual plans are divided by 12, so a customer who pays ₹1.2 lakh for a year adds ₹10,000 to MRR.

• Include: active subscription fees, after discounts
• Exclude: one-time fees, project work, hardware, refunds, GST
• Divide annual plans by 12 to get the monthly figure
• Say whether usage-based charges are included

MRR changes every month for four reasons. New MRR comes from new customers. Expansion MRR comes from existing customers who upgrade or add seats. Contraction MRR is lost when customers downgrade. Churned MRR is lost when customers cancel. Net new MRR is the sum: new plus expansion, minus contraction and churn.

Looking at these parts shows more than the total. A company whose MRR grows 5% a month because of new customers alone is in a different position from one growing 5% because existing customers keep spending more. The second is usually healthier. This breakdown also leads to net revenue retention, which is the subject of its own guide.

ARR is a forward-looking run rate and revenue is what has already been earned and recorded in the accounts. A company that signs ₹10 crore of new annual contracts in March adds ₹10 crore to ARR at once, but only a fraction to its revenue for the financial year ending March, because it earns the money over the following months.

So ARR and reported revenue can differ a lot, especially in a fast-growing company. ARR is not an accounting measure: there is no audited definition, and each company defines it. For this reason, treat ARR claims in news as the company's own statement and check what the definition includes. Indian SaaS startups often sell to customers overseas, and a number quoted in US dollars can move with the rupee exchange rate.

Indian SaaS founders and investors often talk about reaching $1 million, $10 million or $100 million of ARR. These milestones are often used as stages: the first shows the product sells, the later ones show the company can scale. Several Indian SaaS companies have built much of their business abroad, selling in US dollars from bases in cities like Chennai, Bengaluru and Pune.

Do not read a milestone as a guarantee of profit. A company can have high ARR and still lose money if it spends heavily to win customers. ARR should be read together with retention, margins and burn. A fast-growing company with strong retention and healthy margins is far better placed than one with the same ARR and poor retention.

Ask how it is defined, whether it includes usage fees, how much comes from the largest customers, and what share is on contracts as opposed to monthly plans. A company whose ARR depends on one or two customers carries more risk than one with hundreds of small accounts.

Ask also how ARR is split by currency and what the churn has been. These simple questions turn a headline number into a picture of how dependable the revenue really is.