Business vocabulary for subscription pricing: MRR, ARR and churn defined

What to take away

MRR is monthly recurring revenue for one month; ARR is the same base as a yearly run rate.
Churn rate is the share of a named base lost in a period, so state both the base and the period.
Expansion from upgrades can offset churn, so net revenue retention reads differently from gross churn.
MRR and ARR are revenue words; income and profit subtract costs that recurring revenue ignores.

MRR and ARR defined

Subscription pricing has produced a vocabulary that founders use daily and define rarely. The terms below cover the recurring top line, the loss rate applied to it, and the cash questions underneath. Each term connects to the income and profit words that the site's business vocabulary in pairs article separates.

MRR stands for monthly recurring revenue. It is subscription revenue billed in a month, normalized so annual contracts divide by twelve and quarterly contracts by three. Setup fees stay outside MRR unless the contract repeats them.

ARR stands for annual recurring revenue, the same base as a twelve month run rate. ARR is not cash collected. It is the current monthly value of signed recurring contracts, annualized.

MRR is an initialism, not an acronym, a distinction the Wikipedia entry on initialisms sets out. Each letter is spoken.

MRR vs ARR, the distinction that changes the number

MRR and ARR describe one quantity at two time scales. ARR equals MRR times twelve only when the base holds steady all year.

MRR vs ARR at a glance

MRR

Time scale: One month
Best used for: Hiring, staffing, spend
Common error: Annual prepayment inflates
Relationship: Base quantity

ARR

Time scale: Twelve months
Best used for: Board, financing, contracts
Common error: One strong month times twelve
Relationship: MRR times twelve if steady

Two errors follow. A team reports ARR by multiplying one strong month by twelve, which hides seasonality. Or a team reports MRR from a month with a large annual prepayment, which inflates the base.

Use MRR for hiring pace, support staffing and spend limits. Use ARR for board reporting, financing and contract comparisons.

Finance decks mix these terms with older abbreviations. The Investor.gov glossary defines acronyms such as ROI and EBITDA that often sit beside ARR.

Churn rate definition

Churn rate is the percentage of a defined base that leaves during a period. The number is meaningless without two labels: which base, and which period.

Customer churn counts logos. Ten customers at the start, one lost, and churn is ten percent. Revenue churn counts dollars, so the same account moves the figure if it paid above or below average.

Monthly revenue churn equals recurring revenue lost in the month divided by recurring revenue at the start. Involuntary churn from failed payments belongs here too, though the fix differs.

Teams that argue about the number usually disagree about the definition. The Wikipedia article on controlled vocabularies explains why a shared term needs one fixed meaning.

Example: a five account ledger

Four accounts open the month with 1,050 dollars in MRR. One cancels, one upgrades, one downgrades and one signs.

Five account ledger results

1,050 dollarsOpening and closing MRR
28.6 percentGross revenue churn
25 percentLogo churn
76 percentNet revenue retention

Five account ledger

Account	Start	Change	MRR effect
A	200	none	0
B	400	upgrade to 500	+100 expansion
C	300	cancelled	-300 churn
D	150	downgrade to 100	-50 contraction
E	0	new signup at 250	+250 new

Closing MRR is 1,050 dollars, unchanged. Gross revenue churn is 300 divided by 1,050, about 28.6 percent. Logo churn is 25 percent. Net revenue retention is 800 divided by 1,050, about 76 percent, because the new account is excluded.

Four steps keep the ledger honest:

Five account ledger

Fix the opening base before recording any change.
Classify every movement as new, expansion, contraction or churn.
Divide losses by the opening base, never the closing one.
Report retention without new logos, then report growth separately.

Expansion, contraction and net revenue retention

Expansion revenue comes from upgrades, added seats and metered usage inside existing accounts. Contraction is the mirror image, a downgrade that lowers recurring value without cancelling.

Net revenue retention equals opening MRR plus expansion minus contraction minus churn, divided by opening MRR. A figure above 100 percent means the base grew without a new customer. Gross retention excludes expansion and cannot pass 100 percent.

Marketplace and subscription models keep rewriting the top line. The business acumen trends for 2027 article follows how principal against agent decides which revenue a platform may count.

Vocabulary ages too. The business vocabulary trends for 2027 piece supplies an adoption test and a retirement test for deciding when a term such as ARR earns a place on a pricing page.

Loose usage is often a grammar problem before it is a taste problem. The corporate jargon recoverability test sorts phrases by whether the actor survives the sentence.

Pairing these terms with revenue, income and profit vocabulary

MRR and ARR are revenue words. Revenue is the top line before costs, so neither term says whether the business makes money.

Pairing these terms

Closest accounting word

MRR: Revenue
Net revenue retention: Growth
Gross margin per account: Margin
Collected cash: Cash

The gap

MRR: Recurring slice only, not all sales
Net revenue retention: Expansion minus churn, no new logos
Gross margin per account: After the cost of serving that account
Collected cash: Money received, not money billed

Income and profit sit further down the statement, after payroll, hosting, sales commissions and taxes. A company can post rising ARR and still burn cash if collections lag.

Markup and margin are not substitutes. Markup compares price to cost, while margin compares profit to price, and mixing them overstates a pricing change.

Common questions

Is ARR simply MRR multiplied by twelve?

Only when the base is stable. Multiplying one strong month by twelve ignores annual prepayments, seasonality and churn.

Does churn rate count customers or dollars?

Both measures exist, and the label must say which. Customer churn counts logos, while revenue churn counts lost dollars against the opening base.

Should MRR include setup fees and one time work?

Usually not. Include them only when the contract repeats them, and label any blended figure.

How does net revenue retention differ from gross?

Gross retention excludes expansion and cannot exceed 100 percent. Net retention adds expansion, so a stable base with upgrades can pass 100 percent despite churn.