What Is Annual Recurring Revenue (ARR)? Formula and Examples

Annual recurring revenue (ARR) answers one question: if every recurring contract you have today simply kept running, how much would it bring in over a year? It's a snapshot, taken on a specific date, of the revenue that repeats. Subscription businesses use it to track growth, set sales targets and talk to investors, because it moves the moment a customer signs, upgrades or cancels.

The catch is that no accounting standard defines ARR. Two companies can both report "ARR" and mean different things, so the useful skill is knowing which choices sit inside the number.

What counts toward ARR and what doesn't

ARR includes revenue a customer is committed to paying again and again, such as subscriptions and recurring support or maintenance, and excludes anything that happens once. Most of the line-drawing is uncontroversial. A few items are judgment calls, and those are where definitions split.

How to calculate ARR

The simplest calculation is monthly recurring revenue (MRR) times 12. If your subscribers pay a combined $15,000 a month, your ARR is $180,000. For contracts billed on other schedules, annualize each one before adding them up:

• Monthly plan: monthly price × 12.
• Quarterly plan: quarterly price × 4.
• Annual plan: the yearly price, minus any one-time fees bundled into the first invoice.
• Multi-year contract: the contract value divided by the number of years. A $90,000 three-year deal adds $30,000 to ARR, not $90,000.

Discounts belong in the number. A customer on a $1,000-a-month list price who pays $800 contributes $9,600 to ARR, because that's what they actually pay.

A worked example: the ARR bridge

Tracking ARR over a year is easiest as a bridge: where you started, what was added, what was lost and where you ended. The numbers below are hypothetical. Say your business entered the year with $600,000 in ARR.

ARR grew 20%, from $600,000 to $720,000. The bridge also shows how much of that growth depended on new sales. Take new customers out and the existing base went from $600,000 to $570,000, or 95% of where it started. That ratio is usually called net revenue retention (above 100% means existing customers grow on their own; below it, the base is shrinking), and it's the first thing to check when ARR growth looks strong: a business that keeps losing its existing customers has to win ever more new ones just to stand still.

Why ARR isn't the same as revenue

ARR is an operating metric; revenue is an accounting figure, reported in the US under GAAP (generally accepted accounting principles). Revenue on an income statement follows accounting rules about when a service is delivered, while ARR records the annualized value of contracts as of a date. Progress Software's annual report states it directly: "ARR is not defined in GAAP", and it generally aligns to billings rather than to GAAP revenue. The same report adds that ARR is not a forecast, since customers may or may not renew.

Timing creates most of the gap. Suppose you sign a $24,000-a-year subscription that starts on October 1. On December 31, your ARR includes the full $24,000. If the service is delivered evenly over the contract, that calendar year's revenue includes only about $6,000 of it, the three months actually delivered.

Definitions differ between companies

Because each company writes its own definition, ARR figures are rarely comparable side by side. Three public filings show how much the rules vary:

• Upland Software multiplies the monthly value of its support and subscription contracts by 12, and leaves out month-to-month contracts and usage fees.
• Progress Software counts all active, binding term-based contracts, including maintenance, cloud and managed services.
• MariaDB assumes contracts expiring in the next 12 months renew on their current terms, and keeps a lapsed contract in ARR for up to 30 days while a renewal is negotiated.

Upland and Progress both warn that their ARR may not be comparable to similarly named measures at other companies. Notice, too, that both Upland and MariaDB use ARR for "annualized recurring revenue". The words differ; the idea is the same.

For public companies, the SEC's 2020 guidance on key metrics expects a company to define the metric, explain how it's calculated and disclose when that calculation changes. Private companies have no such rule, so when a startup quotes its ARR, ask for the definition before comparing it with anything.

ARR compared with MRR, run rate and bookings

• Monthly recurring revenue (MRR) is the same measure over a month. Teams with mostly monthly plans tend to watch MRR; teams selling annual contracts tend to talk in ARR.
• Run rate annualizes all revenue from a recent period, one-time fees included. A month with a large consulting project inflates run rate but leaves ARR unchanged.
• Bookings are the value of contracts signed in a period, often the full multi-year amount. The $90,000 three-year deal above is $90,000 in bookings and $30,000 in ARR.
• Revenue is the accounting figure on the income statement, recognized as the service is delivered rather than when the contract is signed.

Common mistakes with ARR

• Counting multi-year contracts at full value. ARR is one year's worth. Anything more turns it into bookings.
• Folding in one-time fees. A setup fee on a first invoice looks like subscription money but won't come back next year.
• Annualizing a single good month of usage. If usage charges go into ARR, base them on a committed minimum or a steady average, and say so.
• Not flagging customers who've given notice. Under a definition that counts every active contract, a customer who has given notice stays in ARR until the contract ends. Track that churn separately so it doesn't come as a surprise.
• Changing the definition quietly. If you start counting signed-but-not-live contracts, last year's figure has to be restated the same way, or the growth rate means nothing.

ARR usually starts with deals your sales team marks as closed won, and much of the expansion and churn in the bridge comes down to account management after the sale.