Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR) is the value of a company's recurring subscription revenue expressed as a yearly amount. It counts only revenue that repeats under subscriptions or contracts, and excludes one-time fees and professional services. ARR is commonly calculated as Monthly Recurring Revenue multiplied by 12 and is widely used to describe the size of software businesses that sell annual contracts.

How Annual Recurring Revenue Works

There are two common ways to arrive at ARR:

• From MRR: multiply Monthly Recurring Revenue (MRR) by 12. This suits businesses with many monthly plans.
• From contracts: add up the annual value of every active subscription contract. A three-year deal worth $90,000 contributes $30,000 of ARR, not $90,000.

Whichever method is used, the same exclusions apply. Setup fees, implementation projects, training, consulting and other one-time charges stay out. Usage-based charges need a clear rule because they vary month to month: many companies count only committed minimums in ARR and report variable usage separately.

Like MRR, ARR moves through new business, expansion revenue, contraction and churn. Tracking those movements on an annual basis shows how much of the year's growth came from new customers versus the existing base.

Why Annual Recurring Revenue Matters

ARR gives a stable yearly view of the recurring part of a business, which is the part that can be planned around. Companies use it to set annual targets, size sales and support teams, and compare growth year over year. Investors look at it because recurring revenue is more predictable than one-off sales, which is why counting the wrong things in ARR is a common and costly mistake.

ARR is also the usual base for retention metrics in businesses with annual contracts, such as Net Revenue Retention (NRR) measured over 12 months.

Annual Recurring Revenue Example

A B2B compliance tool has 40 customers on annual contracts averaging $12,000 a year, which is $480,000 of contracted ARR. It also has a self-serve monthly plan bringing in $5,000 MRR, which annualizes to $60,000. Total ARR is $540,000.

One customer also paid $20,000 for a one-time data migration project this year. That fee is real revenue, but it does not repeat, so it is excluded from ARR.

Annual Recurring Revenue vs. MRR and Run Rate

ARR and MRR measure the same recurring revenue on different time scales. The bigger confusion is with annual run rate. Andreessen Horowitz (a16z) stresses that in software, ARR means annual recurring revenue, not run rate, and warns against multiplying one month's total bookings by 12, since that pulls in non-recurring fees. Some tools still label MRR x 12 as "annualized run rate", so confirm what is counted before comparing figures.