How to Calculate Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) measures the yearly value of subscription revenue. Learn the standard ARR calculation, when to use ARR vs MRR, and common mistakes.
Annual Recurring Revenue (ARR) is the annualized value of recurring subscription revenue. It represents the predictable revenue a subscription business expects over a full year, normalized from contracts of various lengths.
ARR is widely used by SaaS and subscription companies for:
- Investor and board reporting
- Company valuation
- Annual planning and budgeting
- Comparing revenue to annual operating costs
Basic ARR Formula
ARR = Sum of all active subscription values, normalized to annual
Or equivalently:
ARR = MRR × 12
Step-by-Step Calculation
Step 1: Identify Active Subscriptions
Include subscriptions where:
- Status is "active"
- Contract covers the measurement date
- Customer is in paying status
Step 2: Normalize to Annual Value
Convert all subscription values to annual equivalents:
| Billing Period | Conversion |
|---|---|
| Monthly | Value × 12 |
| Quarterly | Value × 4 |
| Annual | Value as-is |
| Multi-year | Value ÷ years |
Step 3: Apply Exclusions
Exclude non-recurring amounts:
- One-time fees
- Professional services
- Variable usage charges
- Non-permanent discounts
Step 4: Sum All Values
ARR = Σ (Normalized annual value for each active subscription)
ARR Movement Components
New ARR
New ARR = Sum of annual value from new customers acquired in period
Expansion ARR
Expansion ARR = Sum of annual value increases from existing customers
Contraction ARR
Contraction ARR = Sum of annual value decreases from non-churned customers
Churned ARR
Churned ARR = Sum of annual value from churned customers
Net New ARR
Net New ARR = New + Expansion - Contraction - Churned
Example Calculation
| Customer | Billing | Contract Value | Annual ARR |
|---|---|---|---|
| Acme Corp | Annual | $24,000 | $24,000 |
| Beta Inc | Monthly | $500/mo | $6,000 |
| Gamma LLC | Quarterly | $3,000/qtr | $12,000 |
| Delta Co | 2-Year | $48,000 | $24,000 |
Total ARR = $24,000 + $6,000 + $12,000 + $24,000 = $66,000
Common Mistakes
Inconsistency with MRR
ARR should always equal MRR × 12. If they're calculated independently and don't match, definitions are inconsistent.
Including Non-Recurring Revenue
One-time setup fees, services, and overages inflate ARR incorrectly.
Double-Counting Multi-Year Contracts
A 3-year, $90,000 contract is $30,000 ARR - not $90,000.
Point-in-Time vs. Period Confusion
ARR is typically a point-in-time metric (as of a specific date), not a period metric (during a quarter).
ARR in Context-Aware Analytics
metric:
name: ARR
description: Annual Recurring Revenue - annualized subscription value
calculation: MRR * 12
depends_on: MRR
dimensions: [customer_segment, product, region]
currency: USD
owner: finance_team
certified: true
By defining ARR in terms of MRR, you ensure mathematical consistency between the two metrics.
Questions
ARR = MRR × 12. Both metrics measure the same underlying subscription value at different time scales. MRR is monthly; ARR is annual. They should always be mathematically consistent.