If you’re selling subscriptions, whether it’s software, coffee, or curated socks, a few numbers matter more than others. Maybe you see “monthly recurring revenue” on your financial reports, but someone else talks “churn.” Eventually, you’ll also hear about “ARR.” Those three—ARR (Annual Recurring Revenue), MRR (Monthly Recurring Revenue), and churn—aren’t just vanity numbers for boardrooms.
They’re the backbone of any subscription business, big or small. Here’s how these metrics really work, and why you can’t afford to ignore them.
ARR: Simple, but Not Always Straightforward
So, ARR stands for Annual Recurring Revenue. It’s supposed to help you see how much money your subscriptions make you in a year—assuming nothing changes. People often think of ARR as the “big picture metric.”
Let’s say you have 100 customers, each paying $50 a month. That’s $5,000 in MRR. Multiply by 12, and you might say, “Great, my ARR is $60,000.” That’s the standard approach—ARR = MRR x 12.
But here’s the catch: it gets trickier if you offer discounts, annual contracts, or customers on custom plans. If someone pays $480 for a year (a discount versus $50 a month), should you count that as $480 ARR or $600? If you bill someone for a two-year deal, do you average it per year for ARR? These are the little wriggles that trip people up.
The reality is, ARR tells you how stable and predictable your revenue is. If that number keeps going up, it means your business is growing. If it flatlines or drops, it’s time to investigate why.
Common ARR Pitfalls
A lot of businesses, especially new ones, fudge their ARR by counting one-off charges or setup fees in the calculation. True ARR should only include recurring revenue you expect every year. Anything else just makes your books look better than they are.
Also, ARR shouldn’t include revenue from free trials, one-time upsells, or any non-renewing services. If you’re not strict, you might end up making promises to your team—or investors—that your bank account just can’t back up later.
MRR: The Heartbeat of Subscription Finances
MRR stands for Monthly Recurring Revenue, and for most subscription businesses, it’s the number you look at every week. If ARR is your big goal for the year, MRR is your monthly report card. You figure out MRR by adding up all the monthly revenue from active subscriptions.
Say one customer pays $50 a month, another pays $100, and a third is on a $30 plan. Your MRR is $180. If you sign up a new customer on a $25 plan, next month’s MRR is $205. If somebody cancels, it drops.
MRR helps you spot trends quickly. Maybe you’re adding $500 in new business each month, but losing $200 to cancellations. That’s positive growth, but if new sales slow down, your MRR growth can stall right away.
How MRR and ARR Differ
People sometimes use ARR and MRR interchangeably, but they measure on different timelines. ARR is just MRR times 12—unless customers pay up front or plans change during the year.
With MRR, you react quickly to signup boosts and churn spikes. With ARR, you see if your business is building up real, sustaining value. You’ll want to track both, but if you have to pick one to watch every week, start with MRR.
Churn: The “Silent Killer” for Subscription Models
Now, churn is the metric no one likes to talk about—but you can’t ignore it. Churn measures how many customers or how much revenue you lose each month or year.
There are two big types:
– Customer Churn: The percentage of subscribers who cancel in a time period.
– Revenue Churn: The percentage of recurring revenue lost from existing customers (often due to cancellations, downgrades, or contract expirations).
Let’s say you have 100 subscribers and lose five this month. Your customer churn rate is 5%. If the lost customers were on higher (or lower) value plans, your revenue churn might be more (or less) than 5%.
High churn means your business is like a leaky bucket—you pour in new subscribers, but too many pour right out. If your churn is higher than your new sign-ups, you won’t grow for long.
Calculating Churn Without Tearing Your Hair Out
For customer churn, just divide lost customers for the period by the starting total number of customers that period. Revenue churn is similar: divide lost recurring revenue by the total recurring revenue at the start.
So if you lose $500 out of $5,000 MRR, your revenue churn is 10%. If you added $700 in new signups, your net MRR churn might be better than your gross churn.
Why Churn Really Matters
Churn tells you more than whether customers like your product. It reveals issues with your service, onboarding, or even billing process. If your churn is low (sub-5% per month in most industries), your subscription business can grow steadily. If it’s above 10% per month, it’s a warning sign—either the market is saturated, or something’s broken in your sign-up or retention flow.
Reducing churn almost always costs less than winning new customers. You could focus on customer support, better onboarding emails, or even more flexible cancellation options to keep customers around longer.
How ARR, MRR, and Churn Fit Together
ARR, MRR, and churn don’t exist in a vacuum. You might grow MRR quickly, but if churn spikes, ARR will suffer a few months later. It becomes a balancing act: sign up new customers, keep them happy, and limit cancellations as much as you can.
If you only focus on top-line MRR or ARR, you could miss a churn problem and find your business stalled out. On the other hand, obsessing over churn without a steady new signup flow can make you play defense with no real growth.
Turning Metrics Into Action (and Real Decisions)
The smartest businesses don’t just track these numbers—they use them for forecasting, budgeting, and even product launches. If your MRR starts growing steadily, maybe it’s time to invest in customer success. If churn is creeping up, look for product bugs, unhappy onboarding steps, or new competitors luring your customers away.
Good subscription metrics also help marketing teams focus their efforts. If a particular marketing campaign brings in loyal, low-churn customers, you know where to double-down. At the same time, sales and support teams can use churn signals to spot at-risk customers and reach out before they quit.
If you’re curious how this works in practice, look at SaaS companies like Slack, or even subscription box services. Many of them have investor reports showing how tracking churn early led them to revamp their sign-up experience and boost MRR.
Some smaller business owners now use platforms like Cash Register Direct for easier reporting and tracking. That helps even a local gym or book subscription box see their metrics and take action when something changes.
The Messy Parts—And How to Handle Them
Tracking these metrics isn’t always perfect. Data can be messy if you have annual, monthly, or even quarterly billing. Sometimes, new launches create surges in sign-ups that trail off, making it hard to spot true trends.
Segmenting by customer type, region, or sign-up channel can help. If you’re struggling with churn, try surveying defecting users. If your ARR goes up only because you sell more expensive annual contracts, remember you still have to deliver that value over the whole year.
Automated tools and clear definitions help avoid confusion—and a lot of spreadsheets. Even small teams should get into the habit of checking key metrics at least monthly.
Wrapping Up the Subscription Metrics Basics
So, ARR, MRR, and churn aren’t just industry lingo. They build the foundation of any subscription business, whether you sell software, razors, or weekly dog treats.
Start by tracking these three numbers regularly. If you spot a problem, act on it right away. And if you’re still managing them in spreadsheets, it might be time to look into automated systems or reporting tools.
Try Tracking Your Numbers—Then Use Them
If you haven’t already, try calculating your ARR, MRR, and churn rates this month. It’s easier than you think and will probably show you something useful about your business.
For more handy tools or modern solutions, check out platforms that offer recurring revenue analytics or cash register integrations. Consistent tracking might just save you a lot of headaches—or uncover growth hidden in plain sight.
And, if nothing else, you’ll know exactly what to say the next time someone throws “ARR” or “churn” into a meeting. No need for drama—just the facts, and a proper understanding of the numbers that actually matter.