ARR
Also: ARR, Annual Recurring Revenue, Annual Run Rate, Revenu Recurrent Annuel, Chiffre d'affaires recurrent annuel
Annual Recurring Revenue: predictable yearly revenue from subscriptions or contracts, the key health metric for subscription businesses.
What it is
Annual Recurring Revenue (ARR) is the normalized value of the recurring revenue a business expects to earn over a 12 month period from its active subscriptions or contracts. It counts only recurring components (subscription fees, committed platform access, recurring support), and excludes one time items such as setup fees, professional services, or usage overages that are not contractually recurring.
ARR is the annualized cousin of MRR (Monthly Recurring Revenue): ARR is roughly MRR multiplied by 12, though most teams build it directly from contract terms rather than a simple multiplication.
Why it matters
ARR is the headline health metric for SaaS and subscription businesses because it captures predictable, forward looking revenue rather than backward looking booked sales.
- It smooths out the lumpiness of annual or multi year contracts into a comparable run rate.
- It is the denominator for retention metrics like Net Revenue Retention (NRR) and Gross Revenue Retention (GRR).
- Investors and boards use ARR growth, plus efficiency ratios, to value the business.
How it is used in practice
Teams decompose ARR movement into components across a period:
- New ARR: from newly acquired customers.
- Expansion ARR: upsell, cross sell, seat growth from existing customers.
- Contraction ARR: downgrades and reduced seats (negative).
- Churned ARR: fully lost customers (negative).
The walk is: `Beginning ARR + New + Expansion - Contraction - Churn = Ending ARR`.
Common pitfalls to avoid:
- Do not include non recurring services or variable usage that is not committed.
- Convert multi year contracts to an annualized figure (do not book the full contract value as one year of ARR).
- Keep currency and timing conventions consistent.
Worked example
A company starts the year with 1,000,000 in ARR.
- Signs 12 new customers worth 200,000 in New ARR.
- Existing customers upgrade seats: 80,000 Expansion.
- Some customers downgrade plans: 30,000 Contraction.
- Two customers cancel: 50,000 Churn.
Ending ARR = 1,000,000 + 200,000 + 80,000, 30,000, 50,000 = 1,200,000.
Net Revenue Retention (existing base only) = (1,000,000 + 80,000, 30,000, 50,000) / 1,000,000 = 100%, showing expansion just offset losses before new sales.
See also
Frequently asked questions
What does ARR actually measure?
ARR (Annual Recurring Revenue) is the normalized value of recurring revenue a business expects over a 12 month period from active subscriptions or contracts. It counts only recurring components such as subscription fees, committed platform access and recurring support, and excludes setup fees, professional services and non-committed usage overages. It is a forward looking run rate, not a record of what has already been booked.
What is the difference between ARR and MRR?
MRR (Monthly Recurring Revenue) is the same idea measured over a month, and ARR is its annualized equivalent: roughly MRR times 12. In practice most finance teams build ARR directly from contract terms rather than multiplying MRR, which avoids distortions from mid-month starts and annual billing.
Who needs to understand ARR: finance, marketing, or both?
Both. ARR is the headline health metric of SaaS and subscription businesses, so a CFO uses it for valuation, forecasting and retention ratios, while a CMO needs it to see how acquisition and expansion contribute to growth. It also serves as the denominator for NRR and GRR, which sit at the intersection of the two functions.
How do you break down ARR movement over a period?
Through the ARR walk, which decomposes the change into four components: New ARR from newly acquired customers, Expansion ARR from upsell, cross-sell and seat growth, Contraction ARR from downgrades, and Churned ARR from customers fully lost. The formula is Beginning ARR + New + Expansion - Contraction - Churn = Ending ARR. Splitting the movement this way shows whether growth comes from new logos or from the existing base.
How should a multi-year contract be counted in ARR?
Annualize it: a three-year contract enters ARR at one year of its recurring value, not at its total contract value. Booking the full contract value as ARR is one of the most common errors and inflates the run rate. The other two pitfalls are including non-recurring services or uncommitted usage, and mixing currency or timing conventions between periods.