What is ARR?
Also known as
Annual recurring revenue
ARR (annual recurring revenue) is the annualized value of the recurring subscriptions you have active right now. In practice it’s almost always MRR × 12: normalize every subscription to a monthly amount, add them up, multiply. It answers “if nothing changed for the next twelve months, how much recurring revenue would we collect?”
That framing matters — ARR is a run rate, a snapshot of the present projected forward. It is not a forecast, and it is not a number you earned.
ARR vs. MRR
They are the same quantity at different scales, so the only real question is which one you report. Monthly-billed and usage-heavy businesses tend to live in MRR because month-to-month movement is the signal. Annual-contract businesses tend to report ARR because it matches how deals are actually sold. Pick one as the reported metric and derive the other, rather than maintaining two calculations that will eventually disagree.
ARR vs. GAAP revenue
GAAP revenue is recognized as you deliver the service. If a customer signs a $120,000 annual contract on December 1, that contract adds $120,000 to ARR on day one, but only $10,000 to December’s recognized revenue. ARR is therefore always ahead of recognized revenue in a growing company, and the gap widens the faster you grow. Finance closes the books on recognized revenue; the ARR number belongs on the growth dashboard, not in the financial statements.
ARR vs. bookings
Bookings are the total contract value signed in a period, including one-time fees, professional services, and multi-year commitments. ARR excludes all of that. A three-year $300,000 contract is $300,000 of bookings and $100,000 of ARR. Mixing them up is the single most common way ARR gets inflated.
What to exclude
Keep out anything that isn’t contractually recurring: setup fees, one-off services, hardware, and usage spikes that aren’t committed. Decide explicitly how to treat trials, customers in a failed-payment state, and discounts — the honest choice is to count the discounted amount you actually bill.
Once you have ARR, the interesting work is decomposing its movement into new, expansion, contraction, and churn, and dividing it by customers to get ARPU. Start with the MRR metric guide for the normalization SQL, and revenue analytics for the wider picture.
Related terms
Put it to work
- MRR — Metric
- ARPU — Metric
- MRR dashboard — Dashboard
- Revenue analytics — Overview
