Annual Recurring Revenue (ARR)
The predictable recurring revenue a subscription business expects from its active contracts over a 12-month period.
Also known as: ARR
Annual Recurring Revenue, usually shortened to ARR, is the amount of predictable revenue a subscription business expects to earn from its active contracts over a 12-month period. It counts only recurring components of a subscription, such as ongoing license or platform fees, and excludes one-time charges like setup fees, professional services, or usage overages.
ARR matters because it turns a company's book of subscription contracts into a single, forward-looking number that reflects the health of the business. Investors, boards, and revenue leaders use ARR to gauge growth, set targets, and value the company. For sales teams, it frames how deals are measured, because the value of a new customer is often expressed as the ARR the contract adds rather than the total cash it brings in.
How ARR is calculated
At its simplest, ARR is the sum of the annualized recurring value of all active subscriptions. If a customer pays 24,000 for a two-year contract, the ARR from that contract is 12,000 per year, not the full 24,000. Multi-year deals are divided by their term to reflect the yearly recurring value.
If you already track Monthly Recurring Revenue (MRR), you can derive ARR by multiplying MRR by 12. The key discipline is including only recurring line items. One-time payments, variable usage charges, and services revenue are left out because they are not guaranteed to repeat.
- Annualize each contract's recurring value, then sum across all active customers.
- ARR = MRR x 12 when you bill and track monthly.
- Divide multi-year contract value by the number of years to get annual value.
- Exclude setup fees, training, professional services, and non-recurring charges.
Where ARR comes up in B2B sales
ARR is the default currency of subscription and SaaS businesses. When a rep closes a deal, the win is usually recorded as the ARR added, and quotas are often set as an ARR target for the year. Sales leaders track new ARR from fresh logos separately from expansion ARR generated by upselling and cross-selling existing accounts.
Because ARR reflects only recurring revenue, it gives everyone a shared, comparable way to talk about deal size and pipeline. A 50,000 deal with 40,000 of recurring software and 10,000 of one-time services counts as 40,000 of new ARR.
- Quotas and targets are frequently expressed in ARR rather than total contract value.
- New ARR, expansion ARR, and churned ARR are tracked separately.
- Board decks and forecasts lean heavily on ARR trends.
- Deal size is often communicated as the ARR it contributes.
How ARR relates to nearby terms
ARR and MRR measure the same thing over different time frames; ARR is essentially MRR annualized, and companies pick whichever fits their billing cycle. ARR suits annual and multi-year contracts, while MRR suits month-to-month subscriptions.
ARR is distinct from Total Contract Value (TCV), which includes everything a customer will pay over the full contract term, including one-time fees. It also differs from Annual Contract Value (ACV), which measures the average annualized value per contract, sometimes including non-recurring elements depending on how a company defines it. Recognized revenue, an accounting figure, can differ from ARR because it follows accounting rules rather than a forward run rate.
- MRR is the monthly equivalent of ARR (ARR = MRR x 12).
- TCV includes all contract revenue over its full term, including one-time charges.
- ACV is the average annualized value per contract and definitions vary.
- Recognized revenue follows accounting standards and may not match ARR.
Common mistakes with ARR
The most frequent error is inflating ARR by including one-time revenue. Setup fees and professional services can be large but are not recurring, so counting them overstates the run rate. Another mistake is failing to reduce ARR when customers downgrade or churn, which makes the number look healthier than reality.
Teams also confuse ARR with cash. A customer on an annual contract may pay upfront or in installments, but ARR reflects the annualized recurring value regardless of payment timing. Treating booked ARR as guaranteed can be risky too, since a signed contract can still churn at renewal.
- Do not include one-time or non-recurring charges in ARR.
- Always subtract contraction and churn, not just add new business.
- Remember ARR is a run rate, not collected cash.
- Booked ARR is not guaranteed; renewals still carry churn risk.
Frequently asked questions
What is the difference between ARR and MRR?
They measure the same recurring revenue over different periods. ARR is the annual figure and MRR is the monthly figure, so ARR generally equals MRR multiplied by 12. Companies choose the one that matches their billing cadence.
Does ARR include one-time fees?
No. ARR counts only recurring subscription revenue. One-time charges such as onboarding, setup, training, and professional services are excluded because they are not expected to repeat each year.
Is ARR the same as revenue on the income statement?
Not exactly. ARR is a forward-looking run rate of recurring revenue from active contracts, while accounting revenue is recognized according to accounting standards and can differ in timing and composition.