Annual recurring revenue (ARR) is the yearly value of the subscription revenue a company can expect to repeat, counting only recurring contracts that are active today. For a business that bills monthly, ARR is monthly recurring revenue times 12; one-time fees, services and usage spikes stay out.
ARR answers one question: if nothing changed, how much recurring revenue would come in over the next year? That makes it the number SaaS founders quote to investors and the base for most other efficiency metrics.
The ARR formula
ARR = MRR × 12
or, counting contracts directly:
ARR = sum of the annual value of every active recurring contract
(monthly plans × 12, yearly plans at face value,
multi-year deals at their value for one year)Over a period, ARR moves for four reasons, and the bridge between two dates should always add up:
Ending ARR = starting ARR + new + expansion − contraction − churned
A worked ARR example
A company has three kinds of customers on 30 September:
| Customers | Contract | Annual value |
|---|---|---|
| 180 on the monthly plan | $49 a month each | $105,840 |
| 40 on the annual plan | $1,200 a year each | $48,000 |
| 1 enterprise customer | 3-year deal at $36,000 a year, plus a $10,000 onboarding fee | $36,000 |
| Total ARR | $189,840 |
The onboarding fee is real money but it won't repeat, so it isn't ARR. Neither is the full $108,000 value of the three-year deal: only one year of it counts. Divide by 12 and you get MRR of $15,820, which matches the monthly view ($8,820 + $4,000 + $3,000).
Now the quarter's bridge. On 1 July, ARR was $172,000. During the quarter the company added $21,600 from new customers and $6,000 from upgrades, lost $1,560 to downgrades and $8,200 to cancellations:
172,000 + 21,600 + 6,000 − 1,560 − 8,200 = 189,840
Net new ARR for the quarter is $17,840. If your bridge doesn't land on the ARR you computed from contracts, something is miscounted, usually a plan change recorded as a cancel plus a new sign-up.
ARR vs revenue, run rate and bookings
- Revenue is what your accountant recognizes over a period, including services and one-time fees. ARR is a forward-looking snapshot of recurring contracts only.
- Revenue run rate annualizes all of last month's revenue, recurring or not. It can be useful for usage-heavy businesses, but call it run rate, not ARR.
- Bookings and total contract value count the whole signed amount. A three-year $108,000 deal is $108,000 of bookings and $36,000 of ARR.
- ARR vs MRR is just scale. Use MRR when most customers pay monthly, ARR when contracts are annual or when you talk to investors.
Common ARR mistakes
- Counting one-time fees. Setup, onboarding, training and hardware inflate ARR and make the next year look like churn.
- Counting trials and free plans. A trial is a hope, not a contract. It becomes ARR when the first payment goes through.
- Annualizing one big month. Usage overages or a seasonal spike times 12 is a forecast, not recurring revenue.
- Ignoring discounts. A customer on 30% off for a year pays 70% of list. ARR should use what they actually pay while the discount lasts.
- Mixing currencies at different rates. Convert every contract at one rate per report, or the number drifts while nothing changed.
- Counting signed contracts that haven't started. Track those as contracted ARR, separately.
Related metrics
- Monthly recurring revenue: the same number at monthly scale, and where the movements are easiest to see.
- Net revenue retention: how much of last year's ARR your existing customers still pay, after upgrades and losses.
- Churn: the cancellations side of the ARR bridge.
- Burn multiple and SaaS magic number: both divide spend by net new ARR.
- Rule of 40: ARR growth plus profit margin.
Get ARR automatically every week
If you bill through Stripe, the Stripe weekly MRR report skill rebuilds MRR from live subscriptions every Monday, with the same rules each time: monthly normalization, discounts applied, trials and metered prices left out. It also splits the week's change into new, expansion, contraction and churn, which is your ARR bridge at weekly scale. Multiply by 12 for ARR.
Run it on a schedule with your own agent and, with a Briefkin token set, it posts one metric card that keeps the history as a chart, so the trend is there without opening a spreadsheet. For MRR next to traffic and active users, use weekly founder metrics.
Questions
What does ARR stand for?
ARR stands for annual recurring revenue: the yearly value of the subscription contracts a company has active today. In SaaS it is the headline size metric that investors, boards and acquirers ask for first.
Is ARR the same as annual revenue?
No. Annual revenue is what you recognized over the last twelve months, including one-time fees and services. ARR is a snapshot of the recurring part only, taken on one day and projected over a year.
Do monthly subscriptions count toward ARR?
Yes. Multiply the monthly value of every active monthly plan by 12 and add it to the annual value of yearly contracts. That is why ARR is simply MRR times 12 when every plan is normalized the same way.
Should usage-based revenue count in ARR?
Count committed minimums, since the customer has agreed to pay them every year. If you also annualize recent usage on top, label that figure separately so nobody mistakes a busy month for a contract.
What is the difference between ARR and CARR?
CARR, contracted ARR, also counts contracts that are signed but not yet live or billing. Report it next to ARR, not instead of it, because a signed contract can still slip or fall through before it starts.