MRR vs ARR: Which to Use and How Both Get Inflated
August 1, 2026
They are the same quantity at different resolutions. The errors that inflate them are identical, consistent, and always in the same direction.
MRR and ARR measure the same thing: contracted recurring revenue at a point in time. ARR is generally MRR multiplied by twelve. Both are run rates rather than measures of revenue earned during a period, and the errors that inflate them are identical, consistent, and always in the same direction.
When each is the right unit
MRR for movement analysis — new, expansion, contraction, churn, reactivation. A month is fine enough resolution to see mechanism.
ARR for external communication and annual planning, where a monthly figure invites a mental multiplication anyway.
Neither, unmodified, for usage-heavy models — only committed minimums are genuinely recurring, and the variable portion needs reporting separately.
The four inflations
All four move the number in the same direction, which is why a figure quoted without its method is worth little.
| Error | What gets included | Effect |
|---|---|---|
| One-off fees | Implementation, onboarding, professional services | Overstates run rate permanently |
| Uncommitted usage | Consumption above a contracted minimum | Run rate swings with customer activity |
| Signature recognition | Full annual value in the signing month | Spikes one month, understates eleven |
| Bookings as ARR | Total value committed rather than current run rate | Overstates by the length of the term |
Source: Errors catalogued here
Why it matters beyond tidiness
Every efficiency ratio takes recurring revenue as an input: net revenue retention, magic number, CAC payback, lifetime value. Inflating recurring revenue inflates all of them simultaneously and in the same direction, which is precisely the pattern a diligence process is built to detect.
The recomputation problem
Method: the monthly reconciliation
Record opening recurring revenue for the month.
Categorise every movement into exactly one bucket: new, expansion, contraction, churn, reactivation. A customer who expands one product and contracts another nets at customer level rather than counting as both.
Strip non-recurring revenue from both ends: services, one-off fees, usage above committed minimums.
Check that opening + new + expansion + reactivation − contraction − churn equals closing exactly.
Where it does not balance, find the miscategorised customer before publishing any retention figure — every retention metric depends on these buckets.
This takes minutes once the categorisation exists, and it is the single highest-yield control in revenue reporting because it validates the inputs to everything downstream.
Where the distinction breaks down
In usage-based models the clean split fails, because a meaningful portion of revenue is neither clearly recurring nor clearly one-off. The workable treatment is to report committed recurring revenue as the run rate and variable consumption as a separate line with its own trend — attempting a single blended figure produces a number that describes neither and cannot be forecast.
In businesses with very long terms and heavy upfront services, ARR understates the customer relationship substantially. That is not an argument for inflating ARR; it is an argument for reporting total contract value alongside it, clearly labelled.
COMMON QUESTIONS
- What is the difference between MRR and ARR?
- They measure the same quantity — contracted recurring revenue at a point in time — at different resolutions, and ARR is usually MRR multiplied by twelve. Use MRR for movement analysis where a month is fine enough to see mechanism, and ARR for external communication and annual planning.
- Should professional services be included in ARR?
- No. Implementation and services revenue is not recurring, however reliably it occurs. Including it inflates the run rate and every ratio computed from it, and an investor recomputing from raw figures will find the gap.
- How do you handle annual contracts in MRR?
- Normalise across the term rather than recognising at signature. Recognising the full value in the signing month spikes that month and understates every subsequent one, which makes the movement analysis unusable.
- Does usage revenue count towards recurring revenue?
- Only the committed minimum. Consumption above a contractual commitment is revenue but not recurring revenue, and treating it as recurring makes the run rate swing with customer activity.
KEY TERMS
Annual Recurring Revenue (ARR)
The annualised value of recurring subscription revenue at a point in time. A run rate, not a measure of revenue earned during a period.
Bookings
The total value of contracts signed in a period, regardless of when revenue is recognised or cash collected.
Usage-Based Pricing
Charging in proportion to consumption rather than by fixed subscription.
Total Contract Value (TCV)
The full value of a contract across its entire term, including non-recurring elements.
Monthly Recurring Revenue (MRR)
The normalised monthly value of recurring subscription revenue. The same quantity as ARR at a finer resolution, and the base for movement analysis.
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