Difference between MRR and revenue recognition

MRR (Monthly Recurring Revenue) and revenue recognition are two key concepts for evaluating the financial performance of businesses that rely on recurring subscriptions. Although both measure recurring revenue, their calculation methods differ, particularly regarding proration and how MRR is calculated at the end of each month.

1. MRR (Monthly Recurring Revenue)

MRR represents the sum of monthly revenues generated by active subscriptions at a given time. The MRR for a period is calculated from the subscriptions active at the end of that period.

MRR calculation

MRR is calculated from invoice lines and the period of each subscription. The formula used is:

$$MRR=∑(Valeur  mensuelle  de  chaque  abonnement  actif)$$

that is

$$∑(\frac {Durée  de  l’abonnement  en  mois}{Montant  HT  de  l’abonnement​})$$

Each subscription is converted into a monthly value by dividing the total subscription amount by its duration in months. For example, an annual subscription of €1,200 has a monthly value of €100 (€1,200 ÷ 12 months).

Practical examples:

• Monthly subscription: A €50 per month subscription, active from February 7 to March 7, contributes €50 to MRR for the month of February.

• Annual subscription: A €1,200 subscription for 12 months, active from January 15 to January 15 of the following year, contributes €100 to MRR for each month, from the start to the end of the period.

• Quarterly subscription: A €450 subscription for 3 months, active from January 10 to April 10, contributes €150 to MRR during the period from January to March.

Proration and contribution calculation

MRR is not prorated: this means that the full value of a subscription is accounted for as soon as the subscription is active, even if it starts or ends in the middle of the month.

Example: A customer subscribes for €100 per month on March 15. The MRR for March will include the subscription in full, even though the subscription only begins halfway through the month.

2. Revenue recognition

Revenue recognition follows strict accounting rules and consists of recognizing revenue when it is actually earned, i.e., when a service is provided. Unlike MRR, revenue recognition is prorated, meaning it is calculated based on the period during which the service was actually provided.

Calculation of recognized revenue

The formula to calculate the recognized revenue for a subscription is as follows:

$$Revenu  reconnu=Montant  de  l’abonnement×\frac{Jours  de  service  dans  le  mois}{Nombre  total  de  jours  dans  le  mois}$$

Proration example: If a customer subscribes to a €100 subscription on March 15 for a one-month period, the recognized revenue for March will be €50 (because the subscription covers 15 days in March: 100 € × (15/31)).

If the subscription renews for April, the recognized revenue for April would be €100, because the subscription covers the entire month. Then €50 for May if it does not renew.

3. Key differences between MRR and revenue recognition

• MRR measures recurring revenues based on subscriptions active at the end of the month. It is calculated on a non-prorated basis: if a subscription starts mid-month, its full amount is accounted for in that month.

• Revenue recognition, by contrast, is prorated: it adjusts amounts based on the actual duration of the subscription in each month.

Summary of differences:

Criterion	MRR (Monthly Recurring Revenue)	Revenue Recognition
Proration	No (the entire subscription is taken into account)	Yes (proration according to days of service)
Calculation period	Calculated at the end of each period (month, quarter)	Calculated as the service is delivered
Objective	Measure the recurring monthly value of subscriptions	Recognize revenue as it is earned

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