There's a moment every founder faces when someone asks, "So how much revenue are you actually making?" and they freeze. Not because they don't know their numbers, but because they're not sure which number the questioner is asking for.

Are they asking about last month's cash? This year's bookings? What the company expects to make? The question feels simple, but the answer isn't. And if a founder can't nail this down, they're flying blind.

Hundreds of founders stumble through this conversation. They've got spreadsheets. They've got projections. They've got big dreams. But when it comes to clearly articulating their recurring revenue model, they sound like they're guessing. And investors can smell uncertainty from a mile away.

The truth is, understanding ARR and MRR isn't just about having the right answer in a pitch meeting. It's about knowing whether a business model actually works. These metrics are the difference between building a sustainable company and chasing revenue that evaporates the moment the founder stops running.

Annual Recurring Revenue (ARR): Your North Star

ARR is the total annualized value of active subscriptions. It's the revenue a company can reasonably expect over the next twelve months based on its current customer base. Think of it as the financial runway, the predictable, recurring income that keeps the lights on and the team paid.

Here's what makes ARR powerful: it's forward-looking. It doesn't care what a company made last year. It cares what the company is going to make this year based on the contracts it has right now. That's why investors love it. It's predictable. It's comparable. It's honest.

ARR only counts subscription revenue. One-time fees, implementation charges, and professional services don't make the cut. Why? Because they don't recur. ARR is about what a company can count on month after month, year after year. If a company has to go out and sell it again next month, it's not recurring. If it happens automatically because a customer is under contract, it counts.

This distinction matters more than founders think. Many inflate their ARR by including one-time revenue, then wonder why their growth metrics look terrible when those sales don't repeat. This is lying to oneself, and eventually, it's lying to investors.

How to Calculate ARR: Breaking It Down

Let's say a customer purchases the following from a SaaS platform:

Annual Platform Fee: $4,500
User Seats (annual): $750
Starter Implementation (one-time): $1,200

The ARR from this customer is $5,250 ($4,500 + $750). The implementation fee doesn't count. It's gone after delivery. It might show up in the P&L for the month, but it has no place in the ARR calculation.

Now let's walk through a real-world scenario that includes expansion and contraction because in the real world, customers don't just sign and stay static. They grow. They shrink. They churn.

January: Customer signs a $9,600 annual contract.

Monthly revenue expectation: $800 ($9,600 ÷ 12)
ARR: $9,600

Every month, the company expects to recognize $800 in revenue from this customer. But the ARR, the total amount expected over the next twelve months stays at $9,600 until something changes.

March: Customer downsells to $7,800.

Monthly revenue expectation: $650 ($7,800 ÷ 12)
ARR: $7,800

They cut back. Maybe they lost a team member. Maybe budget got tight. Whatever the reason, ARR just dropped by $1,800. The monthly revenue expectation is now $650. This is the new baseline until the next change.

July: Customer upsells to $12,000.

Monthly revenue expectation: $1,000 ($12,000 ÷ 12)
ARR: $12,000

They expanded. Maybe they hired. Maybe they launched a new product line. ARR just jumped to $12,000, and the monthly revenue expectation is now $1,000.

Notice something critical: ARR always reflects the current contract value projected forward for twelve months. It's not what a company earned last year; it's what the company would earn over the next year if nothing changed. This is why ARR is a living metric. It breathes. It changes. It reflects the health of a business in real time.

The Psychology of ARR: Why It Matters

ARR isn't just a number. It's a signal. When ARR is climbing month over month, a company is building momentum. Customers are staying. New customers are signing. Expansion is happening. The business is on the right track.

When ARR is flat or declining, there's a problem. Either the company isn't acquiring customers fast enough, or it's losing them too fast, or both. And if founders are honest with themselves, they already know which one it is.

Many founders obsess over new customer acquisition while ignoring churn. They celebrate every new logo, then wonder why their ARR barely moves. The math is simple: if a company is adding $10K in new ARR every month but losing $9K to churn, it's only netting $1K in growth. That's not scaling. That's treading water.

ARR forces founders to face reality. It strips away the vanity metrics and shows whether a business model is sustainable. If ARR isn't growing at a rate that supports the vision, something needs to change. Fast.

ARR Benchmarks: Where Should You Be?

ARR targets vary by stage, but here are general benchmarks for SaaS companies. These aren't arbitrary numbers; they're based on what investors expect to see at each stage of growth.

Seed Stage (Pre-Product/Market Fit)

ARR: $0 - $500K
YoY Growth: 100%+ (often 200-300% in early months)
CMGR: 10-15%

At this stage, companies are still figuring it out. Growth rates should be wild—doubling, tripling, even quadrupling some months. Why? Because they're starting from zero. Small numbers compound fast. If a company isn't seeing explosive growth at this stage, it hasn't found product/market fit yet.

Early Stage (Finding Repeatability)

ARR: $500K - $2M
YoY Growth: 100-200%
CMGR: 8-12%

The company has found something that works. Now it's trying to make it repeatable. Growth should still be strong—doubling year over year—but it's starting to stabilize. Systems are being built. Teams are being hired. What works is being scaled.

Growth Stage (Scaling)

ARR: $2M - $10M
YoY Growth: 80-150%
CMGR: 6-10%

This is the execution phase. The company knows what works. It's doing it at scale. Growth rates start to come down from triple digits, but the business is still growing aggressively. This is where most venture-backed companies should be aiming.

Expansion Stage (Market Leadership)

ARR: $10M - $50M+
YoY Growth: 50-100%
CMGR: 4-8%

The company is a real player now. It's competing for market share. It's defending against competitors. Growth rates slow, but absolute dollar growth is massive. Adding $5M in ARR at this stage is harder than adding $500K at seed, but it's also more valuable.

If a company is below these benchmarks, it's either not finding product/market fit or not executing on growth. If it's above them, it's on fire—or about to burn out trying to sustain the pace. Founders need to know which one they are.

Monthly Recurring Revenue (MRR): Your Heartbeat

MRR is the monthly equivalent of ARR. While ARR measures annual predictability, MRR measures monthly predictability. For month-to-month subscription businesses, MRR is often more relevant than ARR.

Think of MRR as a company's heartbeat. It's the rhythm of the business. Every month, a certain amount of recurring revenue is expected to hit the bank account. If that number is growing, the heart is strong. If it's shrinking, the business is in cardiac arrest.

MRR is especially important for businesses with monthly contracts or those tracking rapid changes. If a company is selling month-to-month SaaS subscriptions, MRR gives a much clearer picture of what's happening right now than ARR does.

How to Calculate MRR: The Monthly View

Take the same customer from the ARR example, but now they're on a monthly plan:

Monthly Platform Fee: $375
Monthly User Seats: $62.50
Onboarding Fee (one-time): $1,200

The MRR from this customer is $437.50 ($375 + $62.50). Again, one-time fees don't count. They're nice when they happen, but they don't recur, so they're not part of the MRR calculation.

Let's walk through expansion and contraction on a monthly basis:

January: Customer signs at $800 MRR.

MRR: $800
Annualized: $9,600 ARR

March: Customer downsells by $200.

MRR: $600
Annualized: $7,200 ARR

July: Customer upsells by $600.

MRR: $1,200
Annualized: $14,400 ARR

MRR shows the monthly pulse of a business. It's the heartbeat—and if it's not growing, the company is flatlined.

The Power of MRR Momentum

Here's what most founders miss: MRR compounds. If a company can add $10K in net new MRR every month, that's $120K in ARR by the end of the year—but that's just the beginning. That $10K added in January keeps recurring for the entire year. The $10K added in February keeps recurring for eleven months. And so on.

This is why even modest MRR growth creates massive ARR growth over time. A company adding $10K in net new MRR every month will add $780K in ARR over twelve months ($10K + $20K + $30K... + $120K). That's the magic of compounding recurring revenue.

But it only works if customers are actually being retained. If a company is adding $10K in new MRR every month but losing $8K to churn, it's only netting $2K. ARR growth for the year would be $156K instead of $780K. Same effort. Radically different outcome.

This is why churn is the silent killer of SaaS businesses. It doesn't feel like a crisis when one customer is lost. But when that customer's MRR stops recurring, it's gone forever. And if a company is losing customers faster than it's adding them, it's on a treadmill that's speeding up while the business is slowing down.

When to Use MRR Instead of ARR

Use MRR when:

Offering month-to-month subscriptions
Tracking monthly momentum is needed
Measuring short-term changes like churn or expansion
Running growth experiments and needing fast feedback
Managing cash flow on a monthly basis

Use ARR when:

Selling annual contracts
Reporting to investors or board members
Projecting long-term growth
Benchmarking against other SaaS companies
Planning headcount or major expenses

Important: ARR isn't always MRR × 12. This trips up a lot of founders. Variable pricing, non-annual contracts, discounts, prepayments, and usage-based billing all create gaps between the two metrics. If both are being reported, the differences must be understood.

For example, if a customer is on a quarterly plan paying $2,400 every three months, their MRR is $800, and their ARR is $9,600. But if they're on an annual plan with a 20% discount, they might pay $7,680 upfront, giving an MRR of $640 and ARR of $7,680. Same customer, different contracts, different metrics.

MRR Benchmarks: Monthly Momentum

The same growth benchmarks apply to MRR, but monthly growth rates—measured as Compound Monthly Growth Rate (CMGR)—are the real indicator:

Seed Stage: 10-15% CMGR (doubling every 5-7 months)

The company is in hypergrowth mode. Every customer matters. Every experiment could be the breakthrough. If growth isn't at double-digit rates every month, the pace isn't fast enough.

Early Stage: 8-12% CMGR (doubling every 6-9 months)

The company is finding its groove. Growth is still aggressive, but a machine is starting to be built. Teams are being hired. Processes are being automated. What works is being scaled.

Growth Stage: 6-10% CMGR (doubling every 7-12 months)

This is execution mode. The company knows what works. More of it is being done. Growth is still strong, but the law of large numbers is kicking in. Adding 10% MRR growth on $100K is easier than adding 10% on $1M.

Expansion Stage: 4-8% CMGR (doubling every 9-18 months)

The company is established. It's competing for market share. It's defending against competitors. Growth rates slow, but absolute dollar growth is massive. This is where companies go public or get acquired.

If CMGR is consistently below the stage benchmark for three months running, something's broken. The company is either not acquiring customers fast enough, or losing them too quickly, or both. This signal shouldn't be ignored. It's the business indicating something needs to change.

The Real Question: What Are You Optimizing For?

ARR and MRR aren't just vanity metrics. They tell whether a business model works. If ARR is growing but MRR is shrinking, annual contracts are being sold but customers are churning before renewal. The company is borrowing from the future. Eventually, it will run out of road.

If MRR is growing but ARR is flat, month-to-month customers are being added who aren't committing long-term. A house is being built on sand. One bad month and they're gone.

The best SaaS businesses have both metrics moving in the same direction: up and to the right. New customers are signing. Existing customers are staying. Expansion is happening. Churn is low. The machine is working.

The metric a founder chooses to track reveals what they believe about their business. The choice should be made wisely. Because the metric that gets optimized for becomes the business that gets built.

Futureproof automatically calculates both ARR and MRR, tracks your growth rates, and shows you exactly where your recurring revenue stands. No spreadsheets. No guesswork. Just clarity. If you're ready to stop flying blind and start tracking the metrics that actually matter, book a demo and see how we turn recurring revenue chaos into clarity.