Why Turnover Is Not the Same as ARR or MRR for SaaS Businesses

9 January 2025

Accounting & Compliance, Ambitious Startups, Building a Business, Cloud Accounting, Digital & Tech, Reducing Tax, Selling a Business, Structuring a Business

In the SaaS (Software as a Service) industry, financial metrics are critical for measuring performance, planning growth, and securing investment.

While traditional businesses often focus on metrics like turnover (total revenue generated over a period), SaaS businesses place a higher emphasis on ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue).

Understanding the differences between these metrics is vital, especially for new SaaS businesses aiming to scale and attract investors.

This blog explores why turnover is distinct from ARR and MRR, why ARR and MRR are key metrics for new SaaS businesses, and how they factor into company valuations.

Key Differences: Turnover vs. ARR/MRR

Turnover: Total Revenue, Irrespective of Source

Turnover represents the total income a business generates, encompassing all revenue streams.

For a SaaS company, this might include:

Subscription fees
One-time setup fees
Consulting or professional services
Hardware sales (if applicable)

While turnover gives a snapshot of overall revenue, it lacks the granularity and predictability needed to evaluate the health of a subscription-based business.

ARR and MRR: Predictable, Recurring Revenue

ARR and MRR focus exclusively on subscription revenue, providing a clear picture of the recurring income a SaaS business generates.

These metrics exclude one-time fees, making them more representative of a company’s core revenue engine.

ARR (Annual Recurring Revenue): The total value of subscription contracts normalised to a yearly basis.
MRR (Monthly Recurring Revenue): The monthly equivalent of ARR, reflecting recurring revenue generated in a single month.

By concentrating on recurring revenue, ARR and MRR highlight the sustainability and growth potential of a SaaS business.

Why ARR and MRR Are Key Metrics for New SaaS Businesses

Predictability and Stability

One of the core advantages of the SaaS model is predictable revenue.

ARR and MRR allow businesses to:

Forecast Future Growth: Recurring revenue enables accurate projections for hiring, R&D, and marketing.
Identify Churn: Fluctuations in ARR/MRR provide early warnings of customer attrition, allowing for proactive measures.

Measuring Growth

ARR and MRR offer a consistent way to track growth over time.

Key growth indicators include:

New MRR: Revenue from new customers.
Expansion MRR: Additional revenue from existing customers (e.g., through upsells or cross-sells).
Churned MRR: Lost revenue due to cancellations or downgrades.

By analysing these components, SaaS businesses can pinpoint growth drivers and weaknesses.

Alignment with Business Model

For SaaS businesses, success hinges on recurring revenue rather than one-time transactions. Metrics like ARR and MRR align closely with this model, providing actionable insights that turnover cannot.

Benchmarking Performance

Investors and stakeholders use ARR and MRR to compare SaaS businesses against industry standards.

These metrics serve as benchmarks for evaluating:

Market traction
Customer retention
Revenue scalability

How ARR and MRR Impact SaaS Valuation

Revenue Multiples

Investors often value SaaS businesses using revenue multiples based on ARR. High-growth SaaS companies typically command higher multiples, reflecting their potential for scalable, predictable revenue streams.

Example: A SaaS business with $1 million ARR and a 10x revenue multiple could be valued at $10 million.

Indicators of Growth Potential

ARR and MRR trends signal a SaaS business’s growth trajectory.

Rapid ARR/MRR growth demonstrates:

Strong product-market fit
Effective customer acquisition strategies
High retention rates

Focus on Retention and Upselling

A healthy ARR or MRR profile emphasises customer retention and upselling, key drivers of long-term profitability.

High churn rates can significantly impact valuation, making these metrics critical for due diligence.

Summary

For SaaS businesses, turnover and ARR/MRR are fundamentally different metrics.

While turnover provides a broad view of revenue, ARR and MRR focus on the recurring income that underpins the SaaS model’s predictability and scalability.

For new SaaS companies, these metrics are not just key performance indicators but also critical tools for securing investment and planning growth.

By prioritising ARR and MRR, SaaS businesses can build a foundation for sustainable success and attract the valuations they deserve.

Our work with SaaS Businesses

At Friend & Grant we work with SaaS businesses owners to help them understand the key performance metrics in their businesses, how they integrate with the business financials and how to calculate and best monitor these metrics.

Ultimately we help them understand the importance of these metrics in both the growth and future valuation of their SaaS business.

How we can help

Creating metrics for SaaS companies to better monitor growth and valuation is an important part of the service we at Friend & Grant provide to our clients.

In addition we can provide numerous other tax and business advisory services to our tech clients.

To find out more please call us on 01634 731390, or simply fill out the form for a free discovery call.