What is Annual Recurring Revenue (ARR)?

How ARR is calculated

The basic formulas in plain text:

ARR = monthly recurring revenue (MRR) x 12

For a single contract: ARR = annual recurring amount of the contract

ARR counts only revenue that repeats. Setup fees, implementation projects, hardware and other one-time charges are excluded.

ARR changes over time. New contracts and expansions add to it. Downgrades and cancellations reduce it.

A hypothetical example

This is a hypothetical example. Acme Example Software has three customers paying $1,000, $2,500 and $4,000 per month. One of them also paid a $5,000 setup fee.

MRR = $7,500. ARR = $7,500 x 12 = $90,000. The $5,000 setup fee is not part of ARR.

Common mistakes

• Counting one-time fees. They inflate ARR and make later periods look like a decline.
• Confusing ARR with TCV. A three-year deal adds one year of recurring value to ARR, not three. The full commitment is TCV.
• Confusing ARR with ACV. ACV describes one contract. ARR describes the whole customer base at a point in time.
• Using list price. ARR should reflect what customers pay after discounts.

On a quote, the cleanest way to keep these apart is to show recurring and one-time totals separately. forquotez does this and adds TCV when a term is set. See multi-year contracts and TCV, or run the numbers in the TCV and ACV calculator.