Definition
Annual recurring revenue (ARR) is the yearly value of a company's recurring subscriptions. It's the same idea as MRR, measured over a year, and is more common for companies selling annual contracts to businesses.
Formula
ARR = MRR × 12
or, for companies with annual contracts, the sum of the annual value of all active contracts.
Example
A company with $25,000 MRR has $300,000 ARR.
When to use ARR vs MRR
- MRR suits monthly plans and early-stage companies, where month-to-month change matters most.
- ARR suits companies with annual or multi-year contracts, and is the number most often quoted to investors once a company is past early stage.
Common mistakes
- Including one-time revenue. Setup fees and services aren't recurring.
- Annualising a lucky month. ARR should reflect contracted, recurring revenue, not one strong month of usage fees multiplied by 12.
- Confusing ARR with revenue. ARR is a run rate today, not what you'll actually earn over the next year, which depends on churn and growth.