MRR and ARR: The Numbers SaaS PMs Need to Know
Calculate MRR correctly. Track the five components. Diagnose growth gaps with the MRR waterfall. With 2026 benchmarks.
Prerequisites
- • Basic understanding of subscription business models
What MRR Is
MRR (Monthly Recurring Revenue) expresses recurring subscription revenue on a monthly basis. ARR expresses that run rate annually: MRR × 12.
MRR = Sum of monthly-normalized recurring subscription revenue from active customers
Quick examples:
- 10 customers × $99/month = $990 MRR
- 100 customers × $50/month = $5,000 MRR
- $50,000 MRR × 12 = $600,000 ARR
Use MRR for operational decisions such as sales planning, and ARR for annual planning and investor conversations. Both describe the recurring revenue run rate at different scales.
Why new business does not equal MRR growth
If new business adds $30K in MRR but total MRR grows by $10K, the other components account for a net $20K reduction. Review those components to identify what changed.
MRR is easy to misstate when a report leaves out reactivation, contraction, or churn. A waterfall makes each component visible and gives a forecast a clear starting point.
The MRR Waterfall
Ending MRR = Starting MRR + New + Expansion + Reactivation - Contraction - Churn
Track all five components each month.
1. New Business MRR
Money from customers who just started paying.
Compare new business with the prior period and with the capacity of the acquisition channels that produced it. A percentage of total MRR alone does not show whether acquisition is efficient or durable.
2. Expansion MRR
Additional recurring revenue from existing customers, such as upgrades or additional seats.
Examples:
- Customer upgrades from $99 to $199 plan = $100 Expansion
- Team adds 5 more seats at $20 = $100 Expansion
Track expansion by customer segment, plan, and cohort. Its value depends on the gross margin and retention of the accounts that expand, as well as the sales and customer-success work required to earn it.
3. Reactivation MRR
Former customers who come back.
Compare reactivation with the accounts that previously churned, how long they were away, and any win-back offer. It can reveal a useful recovery path, but it does not explain why an account returned.
4. Contraction MRR
Lost money when customers downgrade but don't leave entirely.
Examples:
- Team reduces from 10 to 5 seats at $20/month = $100 Contraction
- Customer moves from $299 to $99 plan = $200 Contraction
Watch for: contraction growing faster than expansion. Investigate the affected cohorts, product usage, pricing, and renewal timing before treating it as a forecast of churn.
5. Churn MRR
Total lost from customers who cancelled.
Review churn by customer segment, contract term, and cohort. Higher churn reduces the revenue available for future expansion, but a single universal cutoff cannot compare self-serve and enterprise businesses fairly.
Try It
Sample read:
- Starting MRR: $50,000
- New: +$8,000
- Expansion: +$3,000
- Reactivation: +$500
- Contraction: -$1,500
- Churn: -$2,000
- Ending MRR: $58,000
Net new MRR is $8,000. New business contributes $8,000, while expansion and reactivation together offset contraction and churn. Investigate those components by cohort before deciding whether to invest in acquisition, expansion, or retention.
SaaS growth and retention comparisons
SaaS Capital's Q1 2025 survey included more than 1,000 private B2B SaaS companies. It reports median year-over-year revenue growth for 2024 by ARR band, so the comparisons below are not stage targets or month-over-month rates.1
| ARR band | Median YoY growth in 2024 |
|---|---|
| Less than $1M | 40% |
| $1M to $3M | 28% |
| $3M to $5M | 24% |
| $5M to $10M | 24% |
| $10M to $20M | 20% |
| More than $20M | 20% |
The survey's all-company median was 25%. Use a matching ARR band and compare the measurement period before drawing a conclusion about your own growth.1
SaaS Capital's April 2026 release narrows the comparison to bootstrapped private B2B SaaS companies with $3M to $20M ARR. For that cohort, median annual revenue growth was 15%, median NRR was 103%, and median gross revenue retention was 91%. The 90th-percentile figures were 42.3%, 117.9%, and 100%, respectively.2
NRR above 100% means the existing-customer cohort expanded after churn and contraction. It does not describe new-customer acquisition, total-company growth, or the profitability of that expansion.
The T2D3 Framework
Battery Ventures partner Neeraj Agrawal introduced T2D3 in 2015 as an ambitious path for annualized revenue: triple, triple, double, double, double.3 Starting at $2M ARR, the arithmetic is:
| Year | ARR | Cumulative multiple |
|---|---|---|
| Start | $2M | 1x |
| Year 1 | $6M | 3x |
| Year 2 | $18M | 9x |
| Year 3 | $36M | 18x |
| Year 4 | $72M | 36x |
| Year 5 | $144M | 72x |
T2D3 is a venture-scale heuristic, not a median or an operating requirement. It does not establish what a company should spend, retain, or achieve in a given market.
Diagnose Your Growth Problem
Use the waterfall to choose where to investigate. The same revenue pattern can have several causes.
| Symptom | Possible explanation | What to investigate |
|---|---|---|
| New MRR is positive, but total growth is flat | Churn or contraction is offsetting additions | Review the waterfall and cancellation reasons. |
| Low expansion, high acquisition cost | Limited upsell opportunities or weak product breadth | Review account usage and needs before testing upsell changes. |
| High contraction over time | Customers may not see value in higher plans | Audit usage data and interview customers who downgraded. |
| Reactivation near zero | Former customers may have no reason to return | Review churn reasons before testing a win-back offer. |
| Net new MRR positive but per-customer revenue dropping | Lower-revenue customers may be replacing higher-revenue ones | Compare customer mix, pricing, and revenue by cohort. |
Choose metrics for your stage
Early in a subscription business, track new MRR alongside total MRR and customer count. As the customer base grows, review expansion and retention by cohort as well.
Read absolute net new ARR alongside percentage growth: they describe the size and rate of additions. An ARR threshold alone does not determine which metric matters most for your business.
AI Prompts for MRR Analysis
Use Claude, ChatGPT, or Gemini. Always ask for grounded analysis, citing the rows you used.
Waterfall Analysis
MRR data for the last 6 months: [paste with starting MRR, new, expansion, reactivation, contraction, churn per month] Find: - The biggest contributor to growth or decline - Trend in expansion vs new business (do not infer cost efficiency from revenue alone) - Months with anomalies (any component 30%+ off the trend) - One recommendation per anomaly Cite the specific months and numbers you used.
NRR Diagnosis
Cohort revenue data: [paste] Calculate NRR by cohort. Identify the strongest and weakest cohorts. Compare acquisition channel, plan tier, and persona where the data allows. Suggest possible explanations and the additional evidence needed to test them.
Growth Forecasting
Last 12 months of MRR data: [paste] Project the next 12 months under three scenarios: - Current trajectory - Hold churn flat, lift expansion 50% - Lift new business 30% Show the dollar gap between scenarios. Highlight which lever has the biggest impact.
A 30-Day MRR Sprint
Week 1. Build the full MRR waterfall for the last 6 months. If your data isn't clean, this is the cleanup.
Week 2. Calculate NRR by cohort. Identify the cohorts pulling the average up and the ones pulling it down.
Week 3. Pick the biggest leak. Run cancellation interviews if churn is the issue. Run upsell experiments if expansion is the issue.
Week 4. Set up a recurring 30-minute waterfall review to discuss what changed, what you learned, and what to ship in response.
What This Connects To
Review MRR alongside acquisition costs, lifetime value, and retention:
- LTV Calculator for how MRR translates to lifetime value
- CAC Calculator for unit economics math
- Retention Analytics for the retention drivers behind NRR
- Conversion Rate for the top of funnel