What is Annual Recurring Revenue (ARR)?

ARR (annual recurring revenue) is the yearly value of a company’s active subscription and contract revenue, excluding one-time fees, and B2B companies use it as the headline measure of size and growth.

At a glance

• ARR full form: annual recurring revenue. In SaaS it’s usually calculated as MRR × 12.
• ARR vs revenue: revenue on the income statement includes one-time fees and services. ARR counts only what recurs.
• ARR vs annualized run rate: the two share an acronym. Stripe and Ramp both draw the line the same way: run rate annualizes all recent revenue, while annual recurring revenue annualizes only recurring contract revenue.
• Signed contracts that aren’t live yet belong in contracted ARR, not ARR.
• SaaS Capital’s 2025 survey found a median growth rate of 24% for private SaaS companies with more than $1 million in ARR.

How to calculate ARR

For each active customer, take the recurring amount they pay and convert it to a yearly figure. A $2,000 monthly plan is $24,000 of ARR. A three-year contract worth $90,000 is $30,000 of ARR, not $90,000. Leave out implementation, training, hardware and any other one-time charges. Add up all active customers.

ARR changes for four reasons, the same ones that move MRR: new customers, expansion revenue from existing ones, contraction from downgrades, and churn. Reporting those four lines every month explains the growth rate better than the total does.

Example (illustrative): a company ends the year at $4M of ARR. During the year it added $1.6M from new customers and $500,000 from expansion, and lost $300,000 to downgrades and $400,000 to churn, so it started the year at $2.6M. Growth was about 54%, and a third of what was added from new customers and expansion was offset by losses.

ARR with usage-based pricing

Usage pricing makes ARR harder to pin down, because the bill changes every month. Two common approaches are to count the committed minimum as ARR and report usage above it separately, or to annualize a trailing average and say so. Either works if the method is written down and doesn’t change from one board meeting to the next.

Why ARR matters

ARR is the number investors, boards and acquirers use to size a subscription business, which is why definitions matter. Mixing in one-time fees or signed-but-not-live deals inflates it in ways that come out in diligence. Kept clean, it’s the simplest view of how much revenue the business can count on next year if nothing changes.

Datatruck went from $200K to $2.5M ARR while we ran its sales motion. Read how the Datatruck sales motion was built.

Common ARR mistakes

• Counting total contract value. Multi-year deals are annualized, not counted in full.
• Including services revenue. It doesn’t recur, even if it’s billed every year.
• Calling run rate ARR. A strong month of usage or one-time revenue multiplied by 12 isn’t recurring revenue.
• Reporting only the total. Without new, expansion, contraction and churn, a growth number can hide a retention problem.

Terms that sit next to ARR

ARR divided by the number of accounts is annual ARPA. How much of last year’s ARR you kept is net revenue retention.