What Is ARR? Understanding Annual Recurring Revenue

February 10, 2026

Evie Secilmis

What Is ARR?

Annual Recurring Revenue (ARR) is the total value of recurring revenue from subscriptions, normalized to a one-year period. It represents the predictable, repeatable revenue a company can expect to generate each year from its existing customer base.

ARR is the cornerstone metric for subscription and SaaS businesses. Unlike one-time sales that require constant replenishment, recurring revenue compounds over time—existing customers continue paying while new customers add to the base.

The formula is simple:

ARR = Monthly Recurring Revenue (MRR) × 12

Or, calculated directly:

ARR = (Sum of Annual Contract Values for All Active Subscriptions)

If a customer pays $10,000 per month, they contribute $120,000 to ARR. If another customer pays $50,000 annually, they contribute $50,000 to ARR. Add up all active subscriptions, and you have your total ARR.

Why ARR Matters

Predictable Revenue

ARR represents money you can reasonably expect to collect, assuming customers renew. This predictability enables better planning—hiring decisions, marketing investments, and product roadmaps all benefit from understanding future revenue with confidence.

Valuation Standard

Investors value SaaS companies primarily on ARR multiples. A company with $10 million ARR might be valued at 5-15x that amount depending on growth rate, retention, and market. ARR is the denominator in most SaaS valuation discussions.

Growth Measurement

ARR growth rate—how quickly the number increases year over year—is the primary indicator of business health. Growing from $5 million to $10 million ARR (100% growth) signals a very different trajectory than growing from $5 million to $5.5 million (10% growth).

Operational Efficiency

ARR per employee, ARR per sales rep, and similar ratios reveal operational efficiency. These metrics help compare performance across companies of different sizes and inform resource allocation decisions.

ARR vs. MRR: What's the Difference?

Both metrics measure recurring revenue, just over different time horizons:

MetricTime FrameBest ForMRRMonthlyOperational tracking, identifying trendsARRAnnualStrategic planning, investor communication

MRR is more granular and responsive—it shows month-over-month changes quickly. If a large customer churns in March, MRR drops immediately in March.

ARR smooths out variability and provides the big-picture view preferred for board meetings, investor updates, and annual planning.

Most companies track both. MRR for operational management; ARR for strategic communication.

How to Calculate ARR

The Basic Calculation

Sum the annualized value of all active subscriptions:

ARR = Σ (Contract Value ÷ Contract Length in Years)

Example:

Customer A: $120,000/year contract = $120,000 ARR
Customer B: $60,000/2-year contract = $30,000 ARR (per year)
Customer C: $5,000/month = $60,000 ARR

Total ARR = $210,000

What to Include

Include:

Subscription fees for all active customers
Annual support or maintenance contracts tied to subscriptions
Committed usage fees (if contractually guaranteed minimums exist)

Exclude:

One-time fees (implementation, setup, training)
Variable usage above contracted amounts (until billed)
Professional services revenue
Hardware or physical product sales

The principle: only include revenue that recurs predictably with each renewal cycle.

Handling Multi-Year Contracts

For multi-year contracts, normalize to annual value. A $300,000 three-year contract contributes $100,000 to ARR each year, not $300,000.

Some companies track Total Contract Value (TCV) separately to understand long-term committed revenue, but ARR remains the annual slice.

ARR Components: New, Expansion, Contraction, Churn

Understanding where ARR comes from—and where it goes—requires breaking it into components:

New ARR

Revenue from brand-new customers who didn't previously have a subscription. This is the fruit of sales and marketing efforts.

Expansion ARR

Additional revenue from existing customers—upgrades, additional seats, new products, or price increases. Expansion ARR is often the most efficient growth source since no customer acquisition cost is required.

Contraction ARR

Revenue lost when existing customers downgrade—fewer seats, lower tiers, or discounts applied at renewal. Contraction signals customer dissatisfaction or reduced usage.

Churned ARR

Revenue lost when customers cancel entirely. Churn is the enemy of recurring revenue businesses—it creates a "leaky bucket" that new sales must constantly refill.

Net ARR Growth

Net New ARR = New ARR + Expansion ARR - Contraction ARR - Churned ARR

A healthy SaaS business has Net New ARR that's positive and growing. The best companies achieve "negative net revenue churn"—expansion from existing customers exceeds contraction and churn, meaning the existing customer base grows even without adding new logos.

Key ARR Metrics and Benchmarks

ARR Growth Rate

(Current ARR - Prior Year ARR) ÷ Prior Year ARR × 100

Growth rate expectations vary by stage:

Early stage (under $5M ARR): 100%+ growth common
Growth stage ($5M-$50M ARR): 50-100% growth strong
Scale stage ($50M+ ARR): 30-50% growth healthy

Slowing growth isn't necessarily bad—it's harder to double from $100M than from $1M—but understanding the trajectory matters.

Net Revenue Retention (NRR)

(Starting ARR + Expansion - Contraction - Churn) ÷ Starting ARR × 100

NRR measures how much revenue you retain and grow from existing customers:

100% = flat (expansion equals losses)
110% = growing 10% without any new customers
120%+ = exceptional, common in enterprise SaaS with strong expansion

NRR above 100% is the holy grail—your existing customer base generates growth on its own.

ARR per Employee

Total ARR ÷ Total Employees

This efficiency metric varies by go-to-market model:

Self-serve PLG: $200K-$500K per employee
Sales-assisted: $150K-$300K per employee
Enterprise sales: $100K-$200K per employee

Higher isn't always better—it might indicate underinvestment—but declining efficiency warrants investigation.

How to Grow ARR

Acquire New Customers

Sales and marketing efforts that convert prospects into paying customers add New ARR. Optimizing the entire funnel—awareness through close—increases acquisition efficiency. Sales enablement plays a critical role in helping reps convert opportunities. Teams that excel at RFP responses and proposal management capture deals that less-prepared competitors miss.

Expand Existing Accounts

Expansion is often more efficient than acquisition. Strategies include:

Usage-based pricing that grows with customer success
Upsell paths to higher tiers or additional products
Cross-sell into new departments or use cases
Price increases at renewal (if value supports them)

Reduce Churn

Every dollar retained is a dollar you don't need to replace. Churn reduction strategies include:

Proactive customer success engagement
Early warning systems for at-risk accounts
Improved onboarding and time-to-value
Product improvements addressing common pain points

Strong customer success management is essential for retention. See how companies like those in our case studies maintain high retention rates.

Increase Prices

If your product delivers more value than you charge, price increases add ARR across the entire customer base. This requires careful communication but can significantly accelerate growth.

Common ARR Mistakes

Including Non-Recurring Revenue

Implementation fees, one-time training charges, or variable overage fees don't belong in ARR. Inflating ARR with non-recurring items misleads stakeholders and creates forecasting problems.

Double-Counting Multi-Year Deals

A three-year, $300K contract is $100K ARR, not $300K. Counting the full contract value overstates current recurring revenue.

Ignoring Contraction

Some companies report only New and Expansion ARR, hiding contraction in aggregate churn numbers. This masks product or pricing problems that cause customers to downgrade.

Inconsistent Definitions

Ensure finance, sales, and leadership use the same ARR definition. Discrepancies between teams create confusion and erode trust in reporting.

Frequently Asked Questions

What's the difference between ARR and revenue?

ARR is the annualized value of recurring subscriptions; revenue is what you actually collect in a period (GAAP or cash). ARR is a forward-looking metric; revenue is historical. A company might have $10M ARR but only $8M in annual revenue if some contracts were signed mid-year.

Do all SaaS companies use ARR?

Most do, but companies with primarily monthly contracts (no annual commitment) may focus on MRR instead. ARR works best when contracts have meaningful duration.

How does ARR relate to bookings?

Bookings represent new contracts signed; ARR represents ongoing contract value. A $120K annual contract is both $120K in bookings (when signed) and $120K in ARR (ongoing). ARR only changes when contracts start, renew, expand, contract, or churn.

What's a good ARR growth rate?

Context matters—stage, market, and business model all influence expectations. Generally, early-stage companies should target 100%+ growth; growth-stage companies 50%+; and scaled companies 30%+. Compare against similar companies rather than universal benchmarks.

Should ARR include discounts?

Yes—ARR should reflect actual contract value net of discounts. A $100K list price contract with a 20% discount is $80K ARR.