Recurring Revenue 101: MRR vs. ARR

Recurring revenue is income a business receives at regular intervals over time from ongoing subscriptions, contracts, or repeat sales of products or services. It excludes one-time or non-regular revenue.

Leading companies measure monthly recurring revenue (MRR) and annual recurring revenue (ARR) because they are reliable metrics. They provide businesses with a steady income stream and enhance their financial status by ensuring a consistent cash flow—this predictability enables better budgeting, planning, and forecasting.

As businesses navigate the landscape of sustained financial stability, consistently monitoring—and finding ways to increase—recurring revenue becomes an important strategy.

Monthly recurring revenue (MRR) vs. annual recurring revenue (ARR)

MRR is regular income each month, and ARR is steady income over the course of a fiscal year.

MRR offers insights into shorter-term revenue trends, making tracking month-over-month changes in your business’s income easier. ARR gives you an annualized view of recurring revenue, helping you forecast your company’s future financial performance.

When to use MRR:

• Short-term performance analysis: MRR is beneficial for short-term analysis, providing insights into your current monthly revenue from subscription-based products or services. It helps track month-to-month changes, identify trends, and assess the immediate impact of strategies or marketing campaigns on revenue.
• Operational decisions: MRR is also valuable for day-to-day operational decisions, such as adjusting pricing or testing new features.

When to use ARR:

• Long-term financial planning: ARR gives a more stable and predictable view of your company’s annual recurring revenue. It’s valuable for long-term financial planning, forecasting, and measuring the overall growth trajectory of a business.
• Investor relations and valuation: ARR is often used in discussions with investors and stakeholders or for financial reporting purposes, as it can influence the valuation of a company.
• Business scaling and resource allocation: ARR is also beneficial for strategic decisions related to scaling the business, setting budgets, and allocating resources over a longer time horizon.

Recurring revenue impacts business decision-making due to its predictable and stable nature. Businesses with recurring revenue can more confidently allocate resources for growth initiatives, such as expanding the customer base, improving products or services, or investing in new marketing strategies.

To calculate MRR, add the revenue from your active subscription plans, contracts, and repeat purchases for a given month. Exclude any one-time sales or non-recurring charges.

Once you calculate your MRR, the simplest way to calculate your ARR is by multiplying your MRR by 12.

However, if this calculation doesn’t account for expansions of your recurring revenue—such as feature upgrades or add-ons—or your churned recurring revenue, you may consider a different calculation. For example:

ARR = [total amount of all yearly recurring revenue + total amount of all recurring expansion revenue] - churned user revenue

Examples of recurring revenue sources

Recurring revenue streams are established so companies don’t have to rely on unpredictable income, like one-off sales or irregular revenue sources.

Subscription-based recurring revenue

Subscription-based recurring revenue is from customers who pay a regular fee to access a product or service. Customers pay this fee at set intervals—e.g., monthly, quarterly, or annually. It typically involves a contractual agreement where customers subscribe for ongoing access to a product, platform, content, or service.

Leading companies tend to offer subscriptions on a tiered basis. Each tier is differentiated by the level of functionality, target audience, and scope of features offered, so customers can use the tier they need without paying extra for features they don't need.

Netflix, Hulu, and other streaming platforms are well-known examples of monthly subscription-based recurring revenue models. These companies get their recurring revenue from the active subscribers who pay them monthly to access TV shows, movies, and other content.

Other examples include subscription boxes like HelloFresh or BarkBox.

Usage-based recurring revenue

Usage-based recurring revenue is generated by charging customers based on their usage or consumption of a product or service over a specific period. In this model, customers are billed according to the quantity or volume of resources they use or consume. While it’s not the exact same income month-over-month, it still provides a regular and predictable income. By looking at historical usage data, companies can predict how much each customer will likely use each month.

Cloud computing services provided by companies like Amazon Web Services (AWS), Microsoft Azure, or Google Cloud Platform use this recurring revenue model. These companies charge customers based on the resources they consume, such as computing power, storage, data transfer, and other services.

This model is similar to a public works or power company that charges based on the use of electricity, water, or other utilities.

Seat-based recurring revenue

A seat-based recurring revenue model is when a company charges customers based on the number of user licenses, logins, or “seats” the customer needs. This pricing structure typically scales according to the number of users needing access. Companies can easily adjust their agreement by adding more seats as they grow.

A company that might use seat-based pricing is a SaaS company. For example, Salesforce, a customer relationship management (CRM) software, offers various pricing based on the number of user licenses a business needs. Their pricing plans are structured to accommodate different business sizes and needs, charging a certain monthly fee per user.

Strategies for increasing recurring revenue

Increasing recurring revenue is pivotal for sustained growth and financial stability. A strong focus on boosting recurring revenue ensures sustainable income growth and fosters a more resilient business model. The more recurring revenue you generate, the more likely you are to reduce your vulnerability to market fluctuations.

Upselling techniques

In the context of recurring revenue, upselling is a strategy where businesses encourage existing customers to spend more per month or year by offering additional value or features beyond their initial purchase. For example, you may try to get one of your current customers to upgrade to a more feature-rich version of the product they’re currently using. By persuading existing customers to upgrade to higher-tier plans or add premium features, businesses can boost the average revenue generated from each user.

The upselling techniques you use depend on your sources of recurring revenue. With a subscription-based recurring revenue model, you might upsell a customer in the “solo user” tier to the “professional teams” tier, so their whole team can access the product. With a subscription-based model, you might try to upsell premium add-on features.

Cross-selling strategies

Cross-selling is when you offer complementary or related products, features, or services to existing customers to enhance their overall experience and increase the value they derive from the initial purchase.

In the context of a digital product, it usually means recommending related or supplementary products, add-ons, or features that can complement the customer’s existing purchase or enhance their usage of the primary product. You can diversify your revenue sources when users cross-buy multiple products or services from your business. This diversity reduces dependency on a single offering and helps you create a more resilient and stable recurring revenue base.

Imagine a photo-editing software priced at $50 per month that offers add-ons like additional filters or printing services. By employing cross-selling techniques, this software company can promote these add-ons to existing customers who initially purchased the base photo-editing features.

User-retention tactics

The primary goal of user retention is to reduce churn and encourage customers to remain loyal, leading to a consistent stream of recurring revenue. Achieving high retention involves consistently delivering value, addressing user needs, and nurturing ongoing engagement.

A high customer retention rate is often a sign of a sticky product that captivates users and keeps them engaged and loyal to the platform. A sticky product holds users’ interest and commitment, making it more likely they will continue their subscription, contract, or usage.

For instance, consider a subscription-based meditation app. The app employs a range of user-retention strategies to promote ongoing usage and encourage subscription renewals. These strategies may include personalization techniques, such as tailored recommendations based on user preferences and timely notifications prompting regular meditation sessions, as well as offering exclusive content.

Track and monitor recurring revenue to improve your financial health

Evaluating your recurring revenue metrics on an ongoing basis helps you understand your business's financial health and growth. Recurring revenue is a strong indicator of a product’s success and sustainability. By monitoring and understanding recurring revenue, you can make informed decisions, drive strategic growth initiatives, and ensure long-term viability in today’s competitive landscape.

Amplitude Customer Data Platform helps you understand your revenue streams and where your most impactful growth opportunities are. With automated reports providing reliable product insights within seconds, teams gain immediate access to critical data, understanding user journeys at a glance through helpful visualizations.

Get started for free, or explore the demo to learn more about Amplitude’s Customer Data Platform.