What is annual recurring revenue?
Also known as: ARR
Annual recurring revenue (ARR) is the value of a subscription business's recurring revenue normalized to a one-year period. It is the standard headline metric for B2B SaaS companies selling annual contracts.
Formula
How to calculate annual recurring revenue
ARR = MRR × 12- MRR
- Monthly recurring revenue, excluding one-time charges
Worked example
MRR is $30,000. ARR = $30,000 × 12 = $360,000.
In practice
What you need to know about annual recurring revenue
ARR versus MRR: a reporting convention, not a different metric
ARR is simply MRR annualized, and the choice between them is about contract length and audience. Companies selling annual contracts report ARR because it matches how they sell and how investors benchmark. Companies with monthly self-serve motions report MRR because it moves meaningfully month to month. Reporting both is fine; deriving them inconsistently is not.
ARR is not the same as bookings or revenue
ARR is a point-in-time run rate of contracted recurring value. Bookings measure contracts signed in a period, including multi-year totals. GAAP revenue recognizes value as it is delivered. A company can sign $2M in bookings, hold $900K ARR, and recognize $700K revenue in the same year, all correctly. Confusing the three is one of the most common sources of misleading SaaS reporting.
Committed versus contracted ARR
Some companies report ARR including contracts that have been signed but not yet started, or that are in a notice period. Both are defensible if disclosed. Undisclosed, it makes the number incomparable and tends to be discovered during diligence, which is the worst possible time.
How to improve it
Improving annual recurring revenue
Define your ARR policy in writing
State whether it includes signed-not-started contracts and how you treat notice periods. Consistency matters more than which convention you pick.
Pair ARR with NRR
ARR shows size; net revenue retention shows whether it is durable. ARR growth on weak NRR is expensive growth.
FAQ
Annual recurring revenue questions, answered
How do you calculate ARR?+
Multiply monthly recurring revenue by 12, or sum the annualized value of all active recurring contracts. Exclude one-time fees such as implementation and professional services, which are not recurring.
What is the difference between ARR and revenue?+
ARR is a point-in-time run rate of contracted recurring value normalized to a year. Recognized revenue is what you actually earned in a period under accounting rules, including non-recurring items. They routinely differ, and a company can grow ARR while recognized revenue lags.
Should ARR include one-time implementation fees?+
No. Implementation, training, and professional services are not recurring, so including them overstates the run rate and undermines the metric's purpose. Report them separately as services revenue.
Related terms
Keep reading
Monthly recurring revenue
Monthly recurring revenue (MRR) is the predictable revenue a subscription business expects to receive every month, normalized to a monthly figure. It excludes one-time charges such as setup fees, professional services, and overages.
Net revenue retention
Net revenue retention (NRR) is the percentage of recurring revenue retained from existing customers over a period, including expansion, contraction, and churn, but excluding new customer revenue. NRR above 100% means existing customers grew enough to more than offset all losses.
Gross revenue retention
Gross revenue retention (GRR) is the percentage of recurring revenue retained from existing customers over a period, counting churn and contraction but excluding all expansion. GRR can never exceed 100%.
Expansion revenue
Expansion revenue is additional recurring revenue generated from existing customers through upsells, cross-sells, seat additions, or tier upgrades. It is the component of net revenue retention that allows NRR to exceed 100%.
Your next account move is already in the signals
Know the metric. Know why it moved.
Aartha keeps a cited, time-aware memory of every account — so a health change or a churn signal comes with the evidence behind it.