Annual recurring revenue is the annualized value of the recurring subscription revenue a company has under contract at a point in time. It leaves out one-time items such as setup fees, consulting and usage overages that are not committed. Investors and boards use ARR as the main measure of a SaaS company's size and growth.
How ARR is calculated
For annual contracts, ARR is the sum of the yearly subscription value of all active customers. For monthly plans, it is monthly recurring revenue multiplied by twelve. Changes are usually broken into components so you can see where growth comes from.
ARR = sum of annualized recurring contract value for active customers
Ending ARR = starting ARR + new ARR + expansion ARR - contraction ARR - churned ARRWhat to include and exclude
Definitions vary between companies, which is why ARR figures are hard to compare. Write down your own rules and keep them consistent.
- Usually included: committed subscription fees, recurring add-ons.
- Usually excluded: one-time setup or implementation fees, professional services, unbilled pilots.
- Needs a rule: usage-based revenue, discounts that expire, contracts signed but not yet started.
Connecting ARR to acquisition channels
Reporting new ARR by acquisition source turns a marketing conversation into a revenue one. If your CRM records the original source of each deal, you can show how much new ARR came from organic search, paid channels, partners or outbound, with the caveat that attribution rules shape the answer.
ARR is a lagging indicator. Search work shows up in it months after the content is published, so pair it with leading indicators such as qualified sign-ups and pipeline.
Example
Breaking down an ARR change
Hypothetical company Copperwell starts a quarter with $2.0M ARR. It adds $300K new ARR, $120K expansion, loses $40K to downgrades and $80K to cancellations, ending at $2.3M. All figures are illustrative.
Its CRM shows a share of the new ARR was sourced from organic search, which the team reports alongside the attribution rule it used.
Common mistakes
Counting services as ARR
Including one-off fees inflates ARR and misleads anyone comparing it with other companies. Keep services separate.
Treating ARR as recognized revenue
ARR is an operating metric, not an accounting figure. It will differ from revenue on the income statement.
Questions
No. Annual revenue is what was recognized over a year under accounting rules. ARR is a snapshot of recurring contract value at a point in time, annualized.
