ARR (Annual Recurring Revenue)
MRR annualized — the standard way SaaS companies describe their revenue run rate.
ARR is simply MRR multiplied by 12 — an annualized run rate, not a forecast or a guarantee of that much revenue actually landing over the next twelve months if the current MRR doesn't hold steady.
It's the figure most commonly used to describe SaaS company size externally (funding announcements, benchmarking), largely because it produces a cleaner, larger-looking number than a monthly figure while representing the identical underlying revenue.
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ARR is a snapshot of the recurring revenue you have under contract right now, expressed as a yearly figure. There are two ways to reach it, and they should give the same answer.
Both formulas describe a moment in time. ARR is not what you earned last year and it is not a forecast of next year. It is what your current recurring customers are paying, annualized, as of the day you measure.
What counts as ARR, and what does not
The definition depends on one test: does the customer pay this amount again, on a predictable schedule, as long as they stay subscribed? Anything that passes counts. Anything that happens once does not.
- Counts: subscription fees, renewals, upgrades and add-ons from existing customers (expansion), and committed minimum usage fees that a customer pays whether or not they use them.
- Does not count: setup and implementation fees, consulting and training, hardware, one-time purchases, overage or usage charges that vary month to month, free trials, and unpaid pilots.
- Judgment calls: signed contracts that have not gone live, customers who gave notice but haven't left yet, and paused accounts. Pick a rule for each, apply it every month and write it down.
Consistency matters more than which side of each judgment call you choose. Investors comparing your ARR to a prior period, or to other companies, mostly want to know that you counted the same way each time.
Worked example: the ARR bridge
A software company starts the year with $600,000 of ARR. During the year it signs new customers worth $240,000 of ARR, existing customers upgrade for another $90,000 (expansion), some customers downgrade and give back $30,000 (contraction), and others cancel and take $60,000 with them (churn).
| Component | ARR |
|---|---|
| Starting ARR | $600,000 |
| New customers | +$240,000 |
| Expansion | +$90,000 |
| Contraction | −$30,000 |
| Churn | −$60,000 |
| Ending ARR | $840,000 |
Annual ARR bridge
Net new ARR is $240,000 + $90,000 − $30,000 − $60,000 = $240,000, so ARR grew 40% for the year. The ending figure also matches the monthly view: $70,000 of MRR × 12 = $840,000.
The bridge shows something the single ARR number hides. Look at retention among the customers who were there on day one. Net revenue retention is ($600,000 + $90,000 − $30,000 − $60,000) ÷ $600,000 = 100%: upgrades exactly offset losses. Gross revenue retention, which ignores expansion, is ($600,000 − $30,000 − $60,000) ÷ $600,000 = 85%. So all of the 40% growth came from new customers, and the existing base was flat. Two companies can both report $840,000 of ARR and be in completely different health.
ARR versus annualized run rate
Annualized run rate takes one month's total revenue and multiplies it by 12. It is easier to compute and easier to inflate, because it picks up everything invoiced that month, including one-time items.
Suppose the company above earns $70,000 of recurring revenue in December plus $15,000 of one-time setup and consulting fees. Its run rate is ($70,000 + $15,000) × 12 = $1,020,000. Its ARR is $840,000. The run rate overstates recurring revenue by about 21% because it treats a one-time month as if it would repeat twelve times.
The related numbers answer different questions. ARR measures contracted recurring revenue at a point in time. GAAP revenue is what you have earned and recognized under accounting rules over a period. Bookings are the total value of contracts signed. Cash collected is what has actually arrived. A company that signs many annual prepaid contracts in one quarter will show cash and bookings well ahead of revenue, while ARR stays smooth.
Edge cases: multi-year, discounts and usage
- Multi-year contracts. Divide by the term. A $36,000 three-year deal is $12,000 of ARR. Counting the whole $36,000 in the year you sign it inflates ARR by a factor of three.
- Discounts and free months. An annual $12,000 contract with two months free bills $10,000 in year one. Reporting ARR at $12,000 assumes the discount is a one-off promotion, while $10,000 reflects what the customer actually pays. Choose one convention and disclose it.
- Ramp deals. A contract that steps from $10,000 to $20,000 to $30,000 over three years is $10,000 of ARR today, growing as each step takes effect. If you report contracted future ARR, label it separately.
- Usage-based pricing. Count only the committed minimum as ARR, or use a trailing average of usage and say so. Multiplying one busy month by 12 is the usage-based version of the run-rate trap.
- Currencies. Convert non-USD subscriptions at a fixed rate that you set at the start of the year, so exchange-rate swings don't appear as growth or decline.
How to read ARR growth
Growth in ARR is the headline, but the components tell you whether it is durable. Look at four things together: net new ARR each period, the share that comes from new customers versus expansion, gross retention, and net retention. A company that grows 40% with 100% net retention and 85% gross retention is working hard to refill a leaky base. One that grows 40% with 115% net retention is compounding.
Growth also needs to be read against efficiency. The burn multiple shows how much cash it took to add each dollar of net new ARR, and the Rule of 40 combines growth and profit margin into one test. Investors often describe an ideal early-stage path as tripling, tripling and then doubling three years running, sometimes abbreviated T2D3, but that is a shorthand for a strong outcome, not a target for every company.
ARR is also the base for valuation. Multiply by a multiple and you get a rough enterprise value: $840,000 at an illustrative 4× is $3,360,000. Real multiples move with growth, retention, gross margin and market conditions, so don't borrow one from a headline without checking that the company resembles yours. You can model your own figures with the MRR and ARR calculator.
Common mistakes
- Counting one-time revenue. Setup fees, consulting and hardware inflate ARR. In the example, including $15,000 of one-time fees would overstate recurring revenue by about 21%.
- Multiplying a spiky month by 12. Use current MRR from active subscriptions. A month with seasonal demand or a large upgrade wave misleads.
- Counting the total contract value. A multi-year deal adds its annual value, not its full price.
- Double counting upgrades. When a customer moves from a $200 plan to a $300 plan, ARR rises by $100 a month × 12, not by the new plan's full price added on top of the old one.
- Changing the rules mid-stream. Switching how you treat paused accounts or notice periods makes growth look better without anything changing in the business.
- Using ARR for a business without recurring revenue. Agencies and project-based companies can report ARR only for the truly recurring part, such as retainers under contract.
What ARR can't tell you
ARR is not profit and not cash. A company can have rising ARR and still burn money on acquisition. It also says nothing about how long customers will stay, which is why it should be read next to churn rate, MRR and net revenue retention. And because there is no official standard, always ask how a company defines it before comparing two numbers.
Frequently asked questions
ARR, or annual recurring revenue, is the yearly value of the recurring subscription revenue a company has under contract at a point in time. A business with $70,000 of monthly recurring revenue has $840,000 of ARR.
ARR = MRR × 12, or the recurring contract value divided by the number of contract years. A three-year $36,000 contract adds $12,000 of ARR.
Revenue is what a company has earned and recognized over a period under accounting rules. ARR is a point-in-time measure of contracted recurring revenue, annualized. ARR excludes one-time fees and is not an accounting figure, so it can differ from revenue.
MRR is monthly recurring revenue and ARR is the same amount stated for a year. ARR equals MRR × 12. Businesses with mostly monthly plans tend to report MRR, while those with annual contracts tend to report ARR.
No. Setup fees, implementation, consulting, training and hardware are excluded because the customer does not pay them again. Including them turns ARR into a run-rate figure that overstates recurring revenue.
Yes, any business with true subscriptions or retainers can report ARR, as long as it counts only the recurring part. A managed-services firm can report ARR on contracts that renew automatically while excluding one-off projects.
Related terms