Annual Recurring Revenue ARR is a key metric used by subscription-based SaaS companies using term-based agreements. ARR normalizes the contracted recurring revenue components of term subscriptions to a one-year period. An alternative to monthly recurring revenue MRR, ARR is used almost exclusively in B2B subscription businesses with multi-year agreements to help financial leaders understand their annual revenue and visualize company growth year over year.

How do I calculate ARR?

An ARR formula typically includes only contractually committed, fixed subscription fees for an annual contract. Most businesses calculate ARR like this:

ARR = Total revenue of yearly subscriptions + Total revenue gained from add-ons and upgrades + Total revenue lost due to downgrades, cancellations, and churn

Since one-time fees are by definition non-recurring, they are almost always excluded from ARR calculations.

ARR formula

While how these figures are measured depnds on several factors, including whether to us a top-down or bottom-up ARR model, the core formula is:

Total number of customers × average annual contract value = annual recurring revenue

If monthly recurring revenue is already tracked, ARR can also be calculated using:

MRR × 12 = ARR

Both formulas produce the same result when recurring revenue is measured consistently.

Unlike MRR, which can vary dramatically from GAAP revenue due to the variance in days in the month, ARR correlates well with GAAP revenue if your subscriptions are in annual or true multi-year intervals.

ARR calculation examples

The following examples show how ARR is calculated across common SaaS subscription models.

For monthly subscription models, ARR is typically calculated by multiplying MRR by 12.

Subscriptions with expansion and churn

$100,000 starting ARR + $20,000 expansion − $15,000 churn = $105,000 ARR

This scenario reflects both growth from expansion and losses from churn, providing a more accurate view of recurring revenue over time.

What is a good ARR growth rate?

According to a study of 439 SaaS companies, the median ARR growth rate for companies ranged between 40% and 60%. However, average growth rates vary widely based on a business’s current growth stage. Early-stage businesses (earning $1-3M ARR) will experience high growth rates than late-stage ($15M+ ARR) businesses. As ARR climbs, year-over-year growth often slows. Businesses must archieve and sustain a growth rate above 100% to be in the top 25% of company growth worldwide.

ARR is an invaluable metric for measuring the success of your SaaS business. In addition to calculating revenue for a one-year period, it also helps predict future growth and revenue based on the value of renewals and cost of churn, allowing you to manage expenses more easily. Knowing your ARR can even increase revenue by providing insight into what is and isn’t working for customers, which guides upselling and cross-selling.

ARR also provides a picture of your company’s overall health by showing where it’s performing well and where it isn’t. The predictability of subscription services compared to one-time sales is highly attractive to investors, allowing ARR to assess your relationships with customers.

Some of the other short-term and long-term benefits of tracking ARR include: ARR provides a measurable indicator for growth by showing where a company is heading. It enables forecasting of future revenue — since future revenue is often predictable for subscription businesses, ARR helps make more accurate projections. ARR assists in setting realistic financial goals and reflects the overall health of a subscription business.

While ARR, total revenue, and annual profit all speak to a company’s growth and profitability, they’re very different metrics.

ARR is a revenue-based metric that measures predictable revenue. It’s the income from subscription fees over a year, which you can then use to forecast revenue for the next year.

Revenue for SaaS companies refers to the aggregate income generated from all revenue streams including predictable annual subscription fees as well as additional add-on services or any other sources of revenue, before subtracting expenses or costs. It represents the total amount of money received by the SaaS company from its customers over a defined period.

Annual profit is a profitability-based metric, referring to the net income earned after deducting all expenses and costs from the total revenue generated over a year. It represents the financial gain or profit realized by the SaaS company during that period.

To illustrate the differences, let’s consider the finances of a fictional company:

• ARR: The company generates $1 million in revenue annually from existing subscription contracts and recurring revenue, and uses this number to forecast future revenues.
• Total Revenue: The company earned $1.5 million in total revenue, including the $1m in contract value as well as $500,000 in set-up fees, add-ons, and upgrades.
• Annual Profit: The company has an annual profit of $700,000 after deducting $800,000 in expenses for employee salaries, marketing expenses, infrastructure costs, etc.

The most important components of your company’s ARR are: ARR from new customers; ARR from existing customers who renew; incremental increases or expansion in ARR from upgrades and add-ons; incremental decreases or contractions from downgrades; and ARR losses, or revenue churn. ARR for each of these components is often measured and reported in absolute value, relative value, and incremental changes from period to period.

Very simply, ARR is 12 × MRR. ARR is often used in B2B subscription businesses when the minimum subscription term is one year, or those with lower transaction volume and higher transaction value. MRR is typically preferred by B2B businesses with monthly subscriptions, as well as B2C subscription businesses. One trend observed in companies using both: they tend to think of ARR as a valuation metric and MRR as an operating metric.

MRR is calculated by tracking recurring subscription revenue earned in a single month. Because it updates more frequently, MRR is often used to monitor short-term revenue changes and customer churn. ARR provides a longer-term view of expected revenue and is commonly used for annual planning and financial reporting.

There’s only one issue with adopting ARR as your standard normalized revenue metric: it’s difficult to apply to contract terms under a year in duration. If you end up including contracts with term lengths of less than a year, we suggest using MRR as your normalized recurring revenue performance metric. It can be painful to switch your company’s vernacular from ARR to MRR, consuming valuable energy and time — but if the volume of new short-term contracts is growing, it’s worth it.

In most situations, the annual recurring revenue ascribed to a contract element will be roughly equal to the GAAP revenue associated with that contract element. However, while ARR is representative of GAAP revenue, it’s an imprecise financial expression and should never be confused with “reportable GAAP revenue.” For most efficient business discussions, consider adopting the term “GAAP revenue” for discussions relating to accounting and income statement performance, and “ARR” or “MRR” for subscription metrics and analytics.

While ARR is one of the best financial metrics for SaaS companies, it’s only as useful as the context surrounding it. It doesn’t provide clear insight into retention by itself, despite including revenue from renewals and upsells. You should consider ARR in relation to your data on churn and net revenue retention to get a clearer picture of your business’s momentum. ARR also doesn’t account for revenue recognition, and GAAP standards don’t provide guidance on reporting it.

For companies with a subscription-based model, increasing ARR is an important business goal. There are several strategies that can help grow recurring revenue.

Optimize your customer acquisition process

One of the most direct ways to grow ARR is to acquire more customers. Improving your customer acquisition strategy allows you to increase ARR without changing average contract value. While focusing on acquisition, it’s also important to monitor customer acquisition cost (CAC). Looking at CAC vs. ARR helps show whether growth is sustainable.

Encourage upgrades, cross-sells, and upsells

Another way to increase ARR is by raising the average contract value. Offering upgrades, cross-sells, and upsells gives customers more ways to expand their subscriptions over time and increases the revenue generated from each customer.

Improve customer retention to minimize churn

Acquiring new customers takes time and money, which makes retaining existing customers especially important. Once a customer contributes to recurring revenue, losing them directly reduces ARR. Improving SaaS customer retention and reducing cancellations can have a significant impact on annual revenue.

Review your pricing and packaging strategies

Acquiring new customers takes time and money, which makes retaining existing customers especially important. Once a customer contributes to recurring revenue, losing them directly reduces ARR. Improving SaaS customer retention and reducing cancellations can have a significant impact on annual revenue.

In the finance function, ARR is used in or to:

• Report on growth from new contracts, including those with different term lengths
• Report on net & gross expansion and contraction from existing customers
• Assess trends in ASP (average selling price)
• Report on Cohorts (typically by customer start month, quarter, or year)
• Estimate future GAAP revenue

Is there a CARR equivalent to CMRR?

Contracted Monthly Recurring Revenue (CMRR) is the value of the contracted MRR from the booking date through the subscription end date. It’s often used by term subscription businesses with gaps between order date and subscription go-live dates (due to onboarding or simply contract language).

Is there a CARR metric equivalent? There is no reason you can’t track and measure CARR, but it is not a common term. A Google search for CMRR shows plenty of relevant hits, but if you try CARR or “CARR Subscription Metric,” you won’t find much.

ARR reporting in spreadsheets

While ARR does approximate revenue, it is still a normalization value, so you’ll be hard-pressed to find an ARR data field or function in any GL or finance system.

Few billing platforms include ARR, favoring MRR if they have either (though Maxio maintains both MRR and ARR).

Unless your finance system has a rev rec module, it won’t have a Contract Object, and will likely not track subscription start and end dates. This means “cancellation” actions and churn are challenging to report on in your finance system.

Without support for ARR and cancellations in your finance system, most turn to Excel to track and measure ARR and churn.

To perform core ARR calculations, it is easiest to start with a simple “status” or state spreadsheet including the basic information needed to report on the present state of each contract or subscription. This approach works well for a few dozen customers, but its value quickly evaporates as a company grows.

If you’re interested in setting up quick ARR and reports for your business, Maxio’s free downloadable metrics template is a great place to start.

For subscription-based SaaS and AI companies, tracking ARR and MRR is essential for projecting future revenue, assessing growth, and setting realistic revenue goals. These metrics provide the data teams rely on to manage financial health and guide growth decision-making, but collecting and interpreting this information can be challenging without the right tools. Maxio helps SaaS companies automate billing, subscription management, payments, and reporting in one platform — with real-time data for both day-to-day decisions and long-term planning.