Key takeaways
- MRR adds up what every active customer pays each month for their subscription.
- An annual contract counts at its yearly subscription value divided by twelve.
- The change from one month to the next splits into new, expansion, contraction and churned MRR.
- Setup fees, services and other one-off charges never count towards MRR.
How to calculate MRR
To calculate MRR, add up the monthly subscription charge of every active customer, at the price they actually pay after discounts. A customer on a monthly plan adds their monthly charge. A customer on an annual plan adds the yearly subscription value divided by twelve, whatever month the invoice went out.
With illustrative figures: 40 customers paying 200 a month add 8,000, and 5 customers on annual plans worth 6,000 a year add 2,500 between them. The MRR is 10,500. A one-off 1,000 onboarding fee charged the same month adds nothing.
New MRR vs expansion MRR, and the other movements
New MRR comes from customers who were not paying last month, while expansion MRR is extra monthly revenue from customers who already were. Splitting the change this way shows whether growth comes from winning customers or from growing the ones you have, which call for different work.
Net new MRR is new MRR plus expansion MRR, minus contraction MRR and churned MRR. A month can show flat MRR while a lot is happening underneath, such as strong new sales cancelled out by a wave of downgrades.
- New MRR: first subscription revenue from a customer who was not paying before.
- Expansion MRR: upgrades, extra seats and recurring add-ons from existing customers.
- Contraction MRR: downgrades and removed seats from customers who stay.
- Churned MRR: the full monthly value of customers who cancel.
What the MRR formula leaves out
The MRR formula leaves out any money you would not expect again next month without a new sale. Including it makes the business look larger and steadier than it is, and it makes the monthly movements hard to explain.
- Setup, implementation and training fees.
- Consulting and other professional services.
- Usage charges above what the contract commits the customer to.
- Signed contracts whose subscription has not started yet.
- Free plans and trials, which count as nothing until the customer pays.
How to keep MRR honest
MRR stays honest when the counting rules are written down once and applied every month. Decide when a cancellation leaves MRR (the day it takes effect, not the end of a notice period you hope to talk them out of), how to treat pauses, and which exchange rate converts other currencies.
Read MRR as a trend, not a single month. A chart of the four movements over a year says far more than the headline figure, and pairing it with the number of paying customers shows whether growth comes from more customers or larger ones.
What MRR means for a go-to-market team
For a go-to-market team, MRR turns sales, marketing and customer success work into one shared measure. Sales and marketing mostly move new MRR, customer success mostly protects against contraction and churn, and expansion is usually shared between account managers and customer success.
Targets set in new MRR per month keep the team focused on paying customers rather than signed paperwork. A team that hits its new MRR target while churned MRR grows has a retention problem that more selling will not fix.
Where Pebbles Ai fits
Common questions
Do free trials count towards MRR?
No. A trial adds to MRR only when the customer starts paying, and then as new MRR in that month.
Is MRR the same as monthly revenue in the accounts?
No. Accounting revenue follows recognition rules and includes one-off income, while MRR counts only the recurring subscription value of active customers.
How is churned MRR different from contraction MRR?
Churned MRR is the whole monthly value of customers who cancel. Contraction MRR is the reduction from customers who stay but downgrade or remove seats.
About this page. Written by the Pebbles Ai team for people who run sales, marketing and growth. Last updated .
