ARR (Annual Recurring Revenue) is the yearly recurring subscription revenue a business expects, based on current MRR. The formula is MRR × 12. Like MRR it excludes one-time fees, and it breaks into new, expansion, churned, and net-new ARR, the headline metric investors use to value SaaS.
What is ARR?
ARR, or Annual Recurring Revenue, represents the total revenue a company expects to earn from its subscription services over a year, based on the current monthly recurring revenue (MRR).
Like MRR, it excludes one-time payments or non-recurring charges and focuses only on the revenue that repeats annually.
ARR provides a clear view of the company’s financial health over a longer period, making it an essential tool for forecasting and planning.
How to Calculate ARR
Formula for ARR
ARR = MRR × 12Annualized recurring revenue
Types of ARR
- New ARR: Revenue gained from new customers who subscribe during the year.
- Expansion ARR: Additional revenue from existing customers who upgrade their subscriptions or purchase additional services.
- Churned ARR: Revenue lost due to customers canceling or downgrading their subscriptions.
- Net New ARR: The total change in ARR over the year, calculated as New ARR + Expansion ARR – Churned ARR.
Why ARR Matters
- Long-Term Revenue Forecasting: ARR provides a clear picture of a company’s recurring revenue stream over the year, helping in long-term financial planning and forecasting. ARR smooths out the seasonal fluctuations that can affect MRR, providing a more stable and long-term view of the company’s revenue.
- Growth Indicator: Tracking ARR over time helps businesses measure growth and make informed decisions about scaling operations, investing in new products, or entering new markets.
- Investor Appeal: Investors and stakeholders often use ARR to evaluate the financial stability and potential growth of subscription-based businesses. A higher or steadily increasing ARR indicates a healthy, growing business with reliable revenue.
ARR vs. MRR
- MRR (Monthly Recurring Revenue): Focuses on the revenue generated each month from recurring subscriptions.
- ARR (Annual Recurring Revenue): Aggregates this recurring revenue over the entire year, providing a longer-term view. While MRR is useful for short-term tracking and monthly performance, ARR is better for annual financial planning and strategic decision-making.
ARR vs. Revenue
ARR and revenue are often used as if they were the same number. They are not. Revenue is what you have recognized on the income statement for a period, under accounting rules (ASC 606 in the US). ARR is a run-rate: the recurring subscription value you have under contract today, annualized. ARR is not a GAAP measure, so each company defines it, and public SaaS companies spell out their definition when they report it.
Three things push the two apart:
- Growth timing. A growing company's ARR at year end is higher than the revenue it actually earned during the year, because the new customers were only paying for part of it.
- Non-recurring revenue. Implementation fees, one-off services and overages count as revenue but are excluded from ARR.
- Contracts not yet live. Some companies include signed contracts that have not started billing; revenue does not start until the service does.
Illustrative example. MRR starts the year at $100K and grows by $10K every month, reaching $210K in December. Year-end ARR is $210K × 12 = $2.52M. Revenue earned from subscriptions during the year is the sum of the twelve monthly figures ($100K + $110K + … + $210K) = $1.86M. Add $60K of implementation fees and recognized revenue is $1.92M. Same company, same year: $2.52M of ARR, $1.92M of revenue. Quoting the first figure as "revenue" overstates it by about 31%.
Use ARR for momentum and valuation conversations, and revenue for the P&L, taxes and anything audited. For how recognized revenue is built up month by month, see our guide to bookings, billings and revenue and deferred revenue.
ARR FAQ
How do you calculate ARR?
Multiply monthly recurring revenue by 12: ARR = MRR × 12. $10,000 MRR = $120,000 ARR. Only recurring subscription revenue counts, exclude one-time fees.
What's the difference between ARR and MRR?
Both track recurring revenue; MRR is monthly, ARR is annual. MRR suits month-to-month operational tracking; ARR suits long-term planning and is the standard for enterprise SaaS valuation.
What are the types of ARR?
New ARR (new customers), expansion ARR (upgrades), churned ARR (cancellations/downgrades), and net new ARR (New + Expansion − Churned).
Why do investors focus on ARR?
It's a stable, predictable measure of recurring revenue and growth, a steadily rising ARR signals a healthy, scalable subscription business, which drives valuation.