ARR is the annualized value of a company's active subscription revenue.
Key points
- ARR is the annualized version of Monthly Recurring Revenue (MRR) and is commonly calculated as MRR times 12 [1].
- It excludes one-time revenue such as implementation, professional services and hardware [2].
- ARR is a point-in-time run rate, not recognized revenue or bookings, and is not defined by accounting standards [3].
- Net new ARR combines new business, expansion, contraction and churn, linking sales results to retention.
- ARR is the sum of recurring value across all customers, while Annual Contract Value (ACV) describes individual deals [1].
- ARR growth rates and Churn Rate are central to how B2B SaaS companies are valued.
How ARR is calculated
ARR adds up the annualized recurring value of every active customer contract. For a business billing monthly, it is simply current MRR times 12 [1]. For annual or multi-year contracts, the yearly subscription amount counts, not the total contract value. One-time items such as onboarding fees and services are excluded because they do not repeat [2]. Most companies also exclude free users and trials, and count usage-based contracts only at their committed minimum. Because ARR is not a formal accounting measure, definitions vary. Public SaaS companies that report ARR usually explain their method in filings, and private companies should define theirs clearly so that figures shared with investors and staff are consistent over time.
ARR versus revenue
ARR is a forward-looking run rate. If a company signs a large annual contract on the last day of the quarter, ARR rises immediately, while recognized revenue grows only as the service is delivered. Andreessen Horowitz's startup metrics guide warns against confusing ARR with annualized revenue from a single strong month, or with bookings, which record signed contract value regardless of billing timing [3]. These distinctions matter most when reading growth numbers: a company quoting a large run rate based on one month of usage revenue is telling a different story from one with contracted recurring subscriptions. Clear definitions prevent overstatement in board decks and fundraising materials.
Using ARR to plan sales
ARR targets drive most SaaS sales plans. A company that wants to add 1 million dollars of net new ARR in a year can work backward: divide by average Annual Contract Value (ACV) to get the number of deals needed, divide by Win Rate to get the opportunities needed, and divide by stage conversion rates to get the meetings and prospects needed at the top of the Sales Funnel. Then add a buffer for churn and contraction. This reverse plan sets the Sales Quota for each account executive and the activity targets for prospecting. It also shows whether current pipeline volume is realistic, which is why ARR goals and Pipeline Velocity are often reviewed together.
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