GlossaryGrowth & analytics
What is ARR (annual recurring revenue)?
Also called: ARR, annual recurring revenue, annualized revenue, run rate
Definition
Annual recurring revenue (ARR) is the yearly value of a company's recurring subscription contracts, commonly calculated as current MRR multiplied by twelve. It's a snapshot of today's recurring revenue, annualized, not last year's actual revenue.
Annual recurring revenue (ARR), explained
ARR is the headline number for B2B SaaS, especially companies selling annual contracts. It answers one question: if nothing changed, how much recurring revenue would we book over the next twelve months? For companies with monthly plans, it's usually just MRR × 12. For companies with multi-year or annual contracts, it's the annualized value of those contracts.
It's not the same as revenue. Revenue is what you actually earned in a period under accounting rules. ARR is a forward-looking snapshot. A company can have $1M ARR in December and have earned far less than $1M during the year, because it grew into that number. Mixing the two up confuses investors and yourself.
It's also different from "run rate" used loosely. Some founders multiply their best recent month's total revenue, including one-off services, usage spikes or annual prepayments, by twelve and call it ARR. That's not ARR. Only committed, recurring subscription revenue belongs.
Why use ARR instead of MRR? Mostly convention and scale. Enterprise contracts are annual, board decks and fundraising benchmarks are quoted in ARR, and year-level numbers are easier to compare with costs like salaries. Early on, with small numbers and monthly plans, MRR is usually the more useful operating metric.
Whatever you report, define it. "ARR = MRR × 12, excluding services and usage overages" in a footnote saves a lot of confusion.
Why it matters for founders
Investors, acquirers and partners often ask for ARR first. Reporting it correctly, and not inflating it with one-off revenue, protects your credibility when it matters most.
Example
A startup's MRR is $42,000 from subscriptions plus $15,000 of one-time onboarding fees this month. Its ARR is $504,000 (42,000 × 12), not $684,000.
Common mistakes
- Annualizing one-off services or usage spikes.
- Presenting ARR as if it were last year's revenue.
- Not stating how ARR was calculated.
Related terms
- Monthly recurring revenue (MRR)Monthly recurring revenue (MRR) is the normalized amount of subscription revenue a business expects to receive every month from its active customers, excluding one-time fees and usage that isn't committed.
- Churn rateChurn rate is the percentage of customers, or of recurring revenue, lost during a period. Monthly customer churn is customers who cancelled this month divided by customers you had at the start of the month.
- Customer lifetime value (LTV)Customer lifetime value (LTV) is an estimate of the total gross profit a business will earn from a typical customer over the whole time they stay a customer. It's compared with CAC to judge whether acquisition is worth it.
- RetentionRetention is the share of users or customers who keep using or paying for your product over time, usually measured for a cohort that started in the same period. It's the clearest signal that a product delivers lasting value.