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Intermediate

What is ARR

Full name: Annual Recurring Revenue

Also known as: annual recurring revenue, recurring annual revenue, ARR vs run rate, how to calculate ARR

Definition

ARR (annual recurring revenue) is the yearly value of the recurring subscriptions and contracts active today, usually MRR × 12. A snapshot, not a forecast.

Why it matters

ARR matters once a business signs annual contracts or talks to investors, because it states the size of the recurring business in one number.

Common mistakes

Treating ARR as next year's revenue, when it is a snapshot that assumes no cancellations and no new sales.

Related terms

Worked exampleIllustration

The Pilates studio's ARR at the end of the month

The same Pilates studio as in the MRR example, amounts excluding VAT.

  1. MRR at the end of the month, from the MRR example.

    ₪15,250

  2. ARR = 15,250 × 12.

    ₪183,000

  3. A member moves from ₪350 a month to an annual plan at a discounted ₪3,600. This month that member pays ₪3,600 instead of ₪350, while their ARR falls from ₪4,200 to ₪3,600.

    -₪600

  4. Had the annual plan kept the same price, ₪4,200 a year, the member's ARR would not change at all.

  5. A ₪5,000 one off workshop adds to revenue and to cash, and nothing to ARR.

    ₪0

ARR says what today's members are worth over a year if nothing changes. It is not next year's revenue.

Illustration

One month, times twelve

Each box is one month at today's MRR, ₪15,250.

ARR = ₪15,250 × 12 = ₪183,000

Outside the bracket: the one off ₪5,000 workshop adds to revenue and to cash, and nothing to ARR.

The bracket holds only what repeats every month. Pick the annual plan to see what an upfront discount does to it.

ARR is a snapshot: this month's recurring revenue at a yearly pace. One off income stays outside it.

Definition

ARR, short for annual recurring revenue, is the yearly value of the recurring agreements a business has at one moment, usually the end of a month or a quarter. With monthly plans it is MRR times 12. ChartMogul's strict ARR counts only contracts of twelve months or longer, each at its total value divided by its years, and calls MRR times 12 the annualised run rate. Companies define ARR differently, so say which definition a number uses. ARR assumes nothing changes, no cancellations and no new sales. It is not the revenue the P&L will record this year and not the cash that will arrive, and one off fees and projects stay out of it. It is also not ACV (annual contract value), the yearly value of a single customer's contract.

Why it matters

It is an operating metric, not accounting revenue: in a 2019 letter to the US Securities and Exchange Commission, Varonis Systems, a company founded in Israel and listed on NASDAQ, called ARR "an operating metric and not a non-GAAP financial measure". With monthly plans alone, MRR is the working number and ARR adds little.

Directly related: MRR, Churn, NRR.

Formula

ARR = MRR * 12

Improvement tips

  • Offer annual plans for the cash up front and the lower risk of cancellation, not to raise ARR. At the same price ARR stays the same, and a discount lowers it.
  • Say which definition you use, MRR times 12 or contracts of a year or more, and keep it the same every quarter.
  • Automate card updates and payment retries, so expired cards do not turn into cancellations.
  • Show ARR next to revenue and cash. The three numbers answer different questions.

Common mistakes

  • Including one off development, training or setup fees in ARR.
  • Believing that moving customers to annual plans raises ARR.
  • Calling one customer's annual contract value ARR. That number is ACV.
MRR vs ARR

Related terms

FinanceIntermediate

MRR

MRR (monthly recurring revenue) is what active subscriptions and retainers are worth per month, without one off fees. 40 members at ₪350 is ₪14,000 MRR.

FinanceIntermediate

Churn

Churn is the share of customers, or of recurring revenue, lost in a period: those who left in a month divided by those at its start. 5% a month is 46% a year.

FinanceAdvanced

NRR

NRR (net revenue retention) is the share of last year's recurring revenue the same customers pay now, upgrades and cancellations included. Over 100% is growth.

FinanceBeginner

Revenue

Revenue is everything a business sold in a period, before any costs and without the VAT on the invoice. It is the P&L's top line, not profit and not cash.

FinanceBeginner

Cash flow

Cash flow is the money coming into and going out of a business's account in a period. A profitable business can still run short of cash when customers pay late.

TechnologyBeginner

SaaS

SaaS (Software as a Service) is software you rent by subscription and use in a browser or an app, with nothing to install. The vendor hosts and updates it.

Quick check

A member on a ₪350 monthly plan switches to an annual plan at the same price, ₪4,200 paid up front. What happens to ARR?

Choose an answer

Frequently asked questions

Do I need to understand ARR before starting a subscription business?
Know what it means, but run the business on MRR at first. ARR becomes a working number when you sign annual contracts or talk to investors.
When does ARR first become relevant for a new business?
When customers sign contracts of a year or more, or when investors ask for it. With monthly plans alone, MRR says the same thing in the unit you pay your bills in.
How does ARR differ from MRR?
With monthly plans, ARR is MRR times 12, the same snapshot in a yearly unit. Some companies count only contracts of a year or more in ARR and call MRR times 12 the run rate, so check which definition a number uses.
Should a founder focus on ARR or MRR in the early stages?
On MRR. It moves every month and shows new customers, upgrades and cancellations while there is still time to act. ARR is the number for annual contracts and investor conversations.
Why does ARR matter for a business already running?
It states the size of the recurring business in one number that can be compared across quarters and with other companies, as long as the definition stays the same.
What goes wrong when a business reads ARR as a forecast?
It plans spending against revenue that has not happened. A growing business's ARR runs ahead of what it booked in the last twelve months, and cancellations can lower it before the year ends.
How do I calculate ARR without stopping day to day work?
Multiply the MRR at the end of the month by 12, or add up the annual value of every active contract of a year or more. Billing tools show it on the dashboard.
How can a subscription business grow its ARR?
The same way as MRR: new customers, upgrades and fewer cancellations. Moving customers to annual plans at the same price brings cash and may reduce cancellations, but it does not raise ARR, and a discount lowers it.
What does ARR mean in plain words?
It is what all your active recurring agreements would be worth over a year if nothing changed from today. That is why it is not a forecast.
Is ARR complicated to calculate?
The calculation is one multiplication. The care is in the definition: which contracts count, and that one off fees stay out.
Do I need an accountant to calculate ARR?
No. ARR is an operating metric, not an accounting figure, and billing tools show it. The revenue in the financial statements is a different number, and that one is your accountant's work.
Should I include one off consulting projects in ARR?
No. One off projects, training and setup fees are revenue but not recurring, so they stay out of ARR.

Sources: ChartMogul, Annual Recurring Revenue (ARR), chartmogul.com, read September 2026, Varonis Systems, response to an SEC comment letter (Form CORRESP), sec.gov, 2019

Last reviewed: 2026-09-23

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