SaaS & Revenue Metrics

What Is ARR (Annual Recurring Revenue)?

Also known as ARR, Annualized recurring revenue

Definition

Annual recurring revenue (ARR) is the annualized value of all active recurring subscriptions at a given point in time. It is usually calculated as monthly recurring revenue multiplied by 12, or by summing the yearly value of each contract. ARR excludes one-time fees and is the headline growth metric for B2B SaaS.

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Annual Recurring Revenue (ARR) explained

ARR is a snapshot, not a total. It shows how much recurring revenue the business would collect over the next twelve months if every current subscription stayed exactly as it is today. That makes it useful for tracking momentum: when new deals close or customers expand, ARR moves immediately instead of waiting for revenue to be recognized month by month.

Only recurring, contracted revenue belongs in ARR. Setup fees, implementation projects, consulting work and one-off usage overages should be left out. Including them makes ARR look bigger and less predictable than it really is, and buyers or investors will strip them out during diligence anyway. Track that revenue separately so the ARR line stays clean.

Teams usually break ARR movement into new, expansion, contraction and churned ARR. That breakdown shows where growth comes from. A company adding a lot of new ARR from outbound while quietly losing existing customers has a retention problem, not a pipeline problem. ARR is also the base for ratios like the burn multiple, NRR and the Rule of 40.

Annual Recurring Revenue (ARR) formula

ARR = Monthly recurring revenue × 12
Monthly recurring revenue
Normalized monthly value of all active subscriptions, with annual and multi-year contracts converted to a monthly amount and one-time fees excluded.
12
The number of months in a year, used to annualize the current monthly recurring revenue figure.

Worked example: A company has 120 customers paying an average of $700 a month. MRR is 120 × $700 = $84,000. ARR = $84,000 × 12 = $1,008,000, or just over $1 million in annual recurring revenue.

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Annual Recurring Revenue (ARR) example

A B2B analytics company starts the year at $2.4M ARR. During the year it adds $900,000 in new ARR, $300,000 from upgrades, and loses $150,000 to downgrades and $250,000 to cancellations. Ending ARR is $2.4M + $0.9M + $0.3M minus $0.15M and $0.25M, which equals $3.2M. Growth was 33%, but the $400,000 lost to churn and contraction becomes the next focus.

How to calculate ARR

  1. List active subscriptions

    Pull every active recurring contract from your billing system or CRM as of the date you are measuring.

  2. Normalize to annual value

    Convert each contract to a yearly amount. A $1,000 monthly plan is $12,000; a three-year $90,000 deal is $30,000 a year.

  3. Remove one-time items

    Exclude setup fees, services, training and one-off overages. Only predictable, contracted recurring revenue belongs in ARR.

  4. Sum and track movement

    Add the annual values together, then each month break the change into new, expansion, contraction and churned ARR.

Common mistakes

  • Including one-time implementation or consulting fees, which inflates ARR with revenue that will not repeat.
  • Counting signed contracts that have not started yet as current ARR instead of tracking them separately as contracted ARR.
  • Treating ARR as recognized revenue, which confuses accounting reports and investor updates.
  • Annualizing a single strong month of usage-based revenue as if it were committed recurring revenue.

Annual Recurring Revenue (ARR) FAQ

ARR is a forward-looking snapshot of the annual value of current subscriptions. Revenue is what you have actually earned and recognized under accounting rules in a period. A company can end the year at $5M ARR while recognizing only $3.5M in revenue that year, because much of the ARR was added late.

Not always. ARR counts only recurring subscription revenue. Run rate often annualizes total revenue from a recent period, including one-time and usage revenue. For a pure subscription business they can be close, but ARR is the stricter and more trusted figure.

Companies selling mostly annual or multi-year contracts usually report ARR. Companies with mostly monthly plans and smaller customers often track MRR day to day. Many track both, since ARR is simply MRR multiplied by 12 when calculated consistently.

Committed minimums in usage-based contracts are usually included. Variable usage above the commitment is often excluded or reported separately, because it is less predictable. Whatever rule you pick, apply it consistently and explain it when you share ARR with investors.