Business Term
ARR
Annual Recurring Revenue (ARR)
Annual Recurring Revenue / ARR
ARR normalizes recurring subscription revenue into an annualized revenue run rate.
Formula
Basic formula / ARR = MRR x 12 / Annualize monthly recurring revenue to understand current recurring scale
Use when
Use it to explain the annual scale and growth of a SaaS or recurring-revenue business.
Watch out
Active subscription fees, annual contracts, annualized monthly contracts, recurring upsells
Updated: 06/27/2026Quality: ReviewedSources: 1
What it means
Annual Recurring Revenue represents the annualized revenue expected from active recurring contracts. It is not total revenue or cash collected; it isolates the predictable recurring base used for SaaS growth, investor reporting, hiring plans, and budget decisions.
How to calculate it
- Basic formula | ARR = MRR x 12 | Annualize monthly recurring revenue to understand current recurring scale
- ARR Bridge | Opening ARR + New ARR + Expansion ARR - Contraction ARR - Churn ARR = Ending ARR | Decompose growth drivers
- Short-term contracts and usage-based revenue require a fixed company policy and should not inflate recurring revenue.
What counts / what does not
| Item | Treatment | Why it matters |
|---|---|---|
| Include | Active subscription fees, annual contracts, annualized monthly contracts, recurring upsells | They represent the predictable revenue base |
| Exclude | Setup fees, implementation services, one-off consulting, taxes, refunds, one-time overages, hardware revenue | They inflate recurring revenue with non-recurring items |
What moves the number
| Driver | Metric impact | What to watch |
|---|---|---|
| New ARR | Added by new customers | Read with CAC and sales productivity |
| Expansion / Contraction ARR | Moves with expansion or downgrades from existing customers | Reflects PMF, pricing, and adoption |
| Churn ARR | Lost through cancellations | Separate logo churn from revenue churn to find leakage |
When it helps
- Use it to explain the annual scale and growth of a SaaS or recurring-revenue business.
- Use it as an input for investor reporting, budgeting, hiring, and customer success capacity.
How to use it
- Define contract scope, period, discounts, taxes, refunds, inactive accounts, and downgrades before comparing over time.
- Read ARR with MRR, Churn Rate, NRR, CAC, and LTV rather than in isolation.
Decision cautions
- Including one-time revenue overstates business predictability.
- Improved cash collection from annual prepayment is not the same as ARR growth.
Read with
| Metric | Role | Why read together |
|---|---|---|
| MRR | Tracks monthly movement | ARR shows annualized scale |
| NRR / Churn Rate | Shows retention, expansion, and churn from existing customers | Judges ARR quality |
Example
Example: if MRR is 10 million yen, basic ARR is 120 million yen. One-time setup fees and refunds are excluded.
Compare with
| Metric | Difference | Why read together |
|---|---|---|
| Revenue | Accounting revenue | ARR is an operating metric for annualized recurring revenue |
| Cash Flow | Movement of cash | ARR is the scale of contracted recurring revenue |
Common mistakes
- ARR growth can look strong while high churn or contraction weakens the base.
- Definitions vary by company, so the calculation policy must travel with the number.
Frequently asked questions
Is ARR the same as revenue?
No. ARR is an operating metric for annualized recurring revenue and may not match accounting revenue or cash collected.
When should ARR be used?
Use it when explaining recurring scale, growth quality, and the basis for fixed-cost investment.
Sources
| Sources | Kind | Link |
|---|---|---|
| YogoQ Core business foundation editorial baseline | editorial | — |