The MRR formula adds up the monthly amount of every active recurring subscription. One-time and ad-hoc charges and trials are left out. For a services firm, agency or small subscription business, it gives one number for the recurring revenue you can expect next month, before any customers join or leave.
By Avi Vatsa, CEO, Exchange Four Agency. Avi leads the team that installs and runs AI-leveraged revenue systems for owner-led companies. His background spans law, technology, and marketing; he also co-founded Dialora, an AI voice-agent platform for automated lead capture and booking. (Marketer of the Day #1411)
What is the monthly recurring revenue formula?
MRR stands for monthly recurring revenue. The formula is short.
MRR = the sum of the monthly amount of every active recurring subscription
Recurring means the charge repeats on a schedule. Monthly means every plan is brought down to what it earns in one month. A plan billed once a year counts as one twelfth of the yearly price in each month.
ChartMogul's help center states the simplest case in one line.
"For monthly plans, MRR is the amount paid each month for the subscription."
For a services firm or an agency, the subscriptions are usually retainers. For a small subscription business, they are plans. The formula is the same. If most of your income is project work that is billed once, MRR will describe only the small recurring part of the business, so read it that way.
What counts toward MRR?
Count the charges that repeat and that you expect to keep billing. Chargebee's documentation says which subscriptions go into its calculation.
"MRR takes into account all the Active and Non-Renewing Subscriptions."
That page counts Non-Renewing subscriptions as well as Active ones. Ask how your own billing tool defines each status before you rely on the total.
Our reading of what belongs in the number:
- Monthly retainers and monthly plans. Count the amount billed each month.
- Annual plans. Divide the yearly price by 12.
- Quarterly plans. Divide the quarterly price by 3.
- Recurring add-ons. Anything that repeats on the same schedule as the plan.
What does not count toward MRR?
Three kinds of money do not belong in MRR, even though they may be real revenue. The first is one-time charges. ChartMogul's page says so plainly.
"One-time (non-recurring) line items don’t."
The second is ad-hoc charges. Chargebee leaves them out as well, and it points to a setting.
"Any non-recurring ad-hoc charges are not included in the MRR calculation unless specified in the configuration."
The third is trials. A customer who has not started paying has not yet added to recurring revenue. Chargebee's page is direct about it.
"Subscriptions in "Future" and "In Trial" status are not included in the calculation."
For an agency, that rules out setup fees, one-off projects and any work billed once, even when the client is happy to pay again next quarter. When a trial turns into a paid plan, it enters MRR from that point.
How do you calculate MRR step by step?
Here is the method, then an example.
- List every active subscription. Work from subscriptions, not from invoices. An invoice can include one-time items and catch-up charges.
- Remove what does not recur. Take out one-time charges, ad-hoc charges and trials.
- Convert each plan to a monthly amount. Divide yearly plans by 12 and quarterly plans by 3.
- Add the monthly amounts. The total is your MRR on that date.
This is an illustrative example. The clients, plans and amounts are invented to show the arithmetic. They are not a benchmark and not a real company.
| Charge | How it is billed | Counts? | Monthly amount |
|---|---|---|---|
| Retainer, Client A | $2,000 per month | Yes | $2,000 |
| Annual plan, Client B | $12,000 per year | Yes | $1,000 (12,000 divided by 12) |
| Quarterly plan, Client C | $1,800 per quarter | Yes | $600 (1,800 divided by 3) |
| Setup fee, Client D | $3,000 once | No | $0 |
| One-off project, Client A | $4,500 once | No | $0 |
| Plan in trial, Client E | $500 per month, not yet paid | No | $0 |
MRR here is 2,000 plus 1,000 plus 600, which is $3,600. The $7,500 of one-time charges is real income and the $500 trial plan may become income, but none of it is in the number.
What are the MRR movements?
MRR changes for five reasons. Each is a line you can track from one month to the next.
- New. A customer who was never a customer before starts a paid subscription. This is our definition.
- Expansion. An existing customer pays more.
- Contraction. An existing customer pays less but stays.
- Churn. A customer stops paying.
- Reactivation. A former customer comes back. This is also our definition, and tools may handle it differently, as covered below.
ChartMogul's help page on MRR movements describes expansion in these words.
"Existing customers who experience a net increase in subscription MRR in a given report interval."
It describes contraction the same way, in reverse.
"Existing customers who experience a net decrease in subscription MRR in a given report interval."
And it defines churn as a full stop, not a reduction.
"Customers who canceled all of, or their last remaining, subscription in a given report interval."
Net new MRR is the sum of all five lines. The same page gives the total.
"The sum of all Net MRR movements in the report interval."
The arithmetic for a month:
Closing MRR = opening MRR + new + expansion + reactivation, minus contraction, minus churn
This is a second illustrative example. The customers and amounts are invented. They are not a benchmark and not a real company.
A firm opens the month at $20,000 of MRR.
| Movement | What happened | Change |
|---|---|---|
| New | Two new clients at $1,500 and $1,000 per month | plus $2,500 |
| Expansion | One client moves from $2,000 to $2,800 per month | plus $800 |
| Reactivation | One former client returns at $1,200 per month | plus $1,200 |
| Contraction | One client moves from $1,800 to $1,300 per month | minus $500 |
| Churn | One client cancels a $2,000 per month plan | minus $2,000 |
Net new MRR is 2,500 plus 800 plus 1,200 minus 500 minus 2,000, which is $2,000. Closing MRR is 20,000 plus 2,000, or $22,000.
Look at what the single number hides. Gross additions were $4,500 and losses were $2,500. A flat month could be quiet, or it could be strong growth cancelled by heavy losses. The movements show which.
How do tools treat refunds, trials and reactivation?
Billing tools can treat these cases differently, and a setting often decides. Chargebee's line about ad-hoc charges, "unless specified in the configuration", shows that a configuration choice can change the total. We did not read every vendor's page, so we make no claim about any one tool beyond the quotes above.
The practical step is to write your own rules, then check your tool against them.
- Refunds. Our rule of thumb is that a one-time refund does not change the monthly amount, and a cancelled or reduced plan does.
- Trials. Leave them out until the first paid charge, as Chargebee does.
- Reactivation. Pick one treatment and keep it. Counting a returning customer as new in one month and as reactivation in the next makes the movements impossible to compare.
Put the rules in one place the whole team can read. If you compare MRR from two tools, or from a tool and a spreadsheet, check these three rules first, because they are where totals tend to split.
Where does ARR fit?
ARR is MRR times 12, so $22,000 of MRR in the example is $264,000 of ARR, and the full method is in our ARR formula guide.
What mistakes make MRR wrong?
Most errors come from the same few habits.
- Counting invoices instead of subscriptions. One-time items ride along on invoices and inflate the total.
- Counting an annual payment in the month it is paid. A $12,000 yearly plan adds $1,000 to MRR in every month, not $12,000 in one.
- Counting trials. The customer has not paid yet.
- Changing the rules between months. A new rule for reactivation or refunds breaks the comparison with last month.
- Reading MRR as the whole business. It leaves out one-time income by design, so it can say little about a firm that lives on projects.
Two pages on this site help you read the number once you have it. A revenue run rate projects a recent period forward, so check what period it was built from. Net revenue retention asks what the customers you already had did to your revenue, which is the question the movements above begin to answer.
What is the short version?
MRR is the sum of the monthly amount of every active recurring subscription. Convert yearly and quarterly plans to a monthly amount. Leave out one-time charges, ad-hoc charges and trials. Track new, expansion, contraction, churn and reactivation each month, and net them to see how MRR moved. Tools can treat refunds, trials and reactivation differently, so write your rules down and check them against your tool. Then use the same rules every month, so this month's number can be compared with last month's.