Annual Recurring Revenue (ARR)
Growth MetricsAnnual recurring revenue is the standard scale metric for subscription businesses. It expresses the run-rate value of all active subscriptions as if they ran unchanged for a full year, which makes a 50,000 EUR per month customer comparable to a 600,000 EUR per year customer regardless of how each one bills.
It is also the metric most often inflated. Founders quote ARR figures that include one-time services, signed-but-not-started contracts, and customers in active churn. The clean version is narrower: only currently invoicing, currently active, recurring revenue, annualized.
Contents
Key takeaways
- ARR = MRR × 12, or the sum of all annualized contract values across the active customer base.
- ARR includes only recurring revenue: subscriptions, seat fees, and committed usage. One-off services, setup fees, and overages do not count.
- Net new ARR (new + expansion − churn − contraction) is the cleaner growth signal than gross ARR, because it accounts for revenue that quietly leaves.
What is annual recurring revenue?
ARR measures the value of recurring contracts an SaaS business holds, normalized to an annual figure. A customer paying 4,000 EUR per month contributes 48,000 EUR of ARR. A customer on a 60,000 EUR annual contract contributes 60,000 EUR of ARR. A customer paying 5,000 EUR as a one-time setup fee contributes 0 EUR of ARR.
The metric exists because subscription businesses bill in different cadences (monthly, annual, multi-year) but investors and operators want one comparable number. ARR strips out billing cadence and gives a steady-state revenue figure.
It is closely related to monthly recurring revenue (MRR). The two are simply scaled views of the same number. Most teams report MRR internally and ARR externally.
How do you calculate ARR?
Two equivalent formulas:
ARR = MRR × 12
Or, summed directly across the customer base:
ARR = Sum of (Annualized Contract Value of each active customer)
Worked example: a B2B SaaS company has 80 customers paying an average of 1,500 EUR per month, plus 12 enterprise customers on annual contracts averaging 60,000 EUR per year. Recurring base = (80 × 1,500 × 12) + (12 × 60,000) = 1,440,000 + 720,000 = 2,160,000 EUR ARR.
What does not count: one-time setup fees, professional services, training revenue, hardware sales, overage charges that vary unpredictably, and contracts signed but not yet invoicing. Including any of these inflates the number and breaks comparability with peer companies.
Net new ARR is the most actionable derivative: New ARR + Expansion ARR − Churned ARR − Contraction ARR. A company can grow gross ARR while net new ARR is flat or negative, which is the early signal of a retention problem.
ARR benchmarks and growth rates
Growth rate matters more than the absolute number. Common benchmarks for B2B SaaS:
- Sub 1M EUR ARR: triple, then triple, then double (T2D3) is the venture-scale target. Most companies will not hit it.
- 1M to 10M EUR ARR: 3 to 5× annual growth is strong, 2× is the floor for venture-backed companies.
- 10M to 50M EUR ARR: 2 to 3× annual growth is strong; below 2× starts to slow the next funding round.
- 50M to 100M EUR ARR: 60 to 100% growth (the rule of 40 starts to dominate the conversation).
- 100M EUR+ ARR: 30 to 60% is healthy, with rule of 40 (growth rate + free-cash-flow margin) above 40 the IPO standard.
The other number to track alongside ARR is net dollar retention. ARR growth driven by expansion in the existing base is a different (better) story than ARR growth driven entirely by new logo acquisition.
Common ARR reporting mistakes
Three common errors:
- Including non-recurring revenue. Setup fees, training, and one-off services inflate ARR but do not represent run-rate revenue.
- Counting bookings as ARR. A signed annual contract that has not started invoicing yet is bookings, not ARR. Some companies report committed ARR (CARR) for this case; mixing it with live ARR is the error.
- Ignoring contraction. Customers who downgrade reduce ARR. Programs that report only new and expansion ARR overstate growth.
The cleanest practice is to publish four numbers each period: starting ARR, new ARR, expansion ARR, churned plus contracted ARR, and ending ARR. The math should reconcile.
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Frequently asked questions
What's the difference between ARR and revenue?
Revenue is recognized over the period it was earned (typically GAAP-compliant). ARR is the annualized run-rate of currently active recurring contracts at a point in time. A company can have 12M EUR of ARR while reporting only 8M EUR of recognized revenue for the trailing year, because some of the ARR was added recently.
Is ARR the same as bookings?
No. Bookings are the total contract value of deals signed in a period, including one-time fees and the full multi-year commitment. ARR is the annualized recurring portion of contracts currently active. A 3-year, 300,000 EUR contract creates 100,000 EUR of new ARR and 300,000 EUR of bookings.
Should usage-based revenue count toward ARR?
Usage that is contracted with a minimum commit (committed ARR) generally counts. Pure pay-as-you-go usage that varies month to month is more honestly reported as run-rate revenue or annualized recurring usage rather than ARR, because it lacks the contract certainty ARR implies.