ARR Calculator

Behind the number

Annual recurring revenue is MRR × 12, or the annualised value of all active subscriptions. For a business selling mainly annual contracts it is calculated directly from those contract values.

ARR = Σ(annual contract value of active subscriptions), which for monthly plans means multiplying the monthly price by twelve.

It is a run rate rather than a historical figure: it describes what the next twelve months would produce if nothing changed.

How that looks in practice

$58,000 of MRR gives $696,000 of ARR. That is not the revenue for the last twelve months, which would be lower if the business grew during them.

A business that started the year at $40,000 MRR and ended at $58,000 has $696,000 of ARR and recognised revenue closer to $588,000.

Both figures are correct and they answer different questions, one describes the current run rate and the other what was actually earned.

Quoting ARR while comparing against a competitor's recognised revenue is a common and misleading comparison, particularly for fast-growing businesses where the gap is widest.

Where this breaks down

ARR assumes the current base persists for a year, and at 4% monthly churn roughly 39% of it will not. The figure describes a snapshot rather than a forecast.

Businesses without genuinely recurring contracts also report ARR by annualising whatever they billed recently, which is a run rate of one-off sales rather than recurring revenue at all.

What to do next

Use ARR for scale and MRR for management, since monthly movement is where the operating decisions are and annualising it obscures them.

Then report it alongside net revenue retention, which describes what happens to the base rather than what it currently totals. ARR without retention is a number with no trajectory attached.

Why ARR became the standard headline

It is comparable across businesses of different sizes and billing conventions, it grows smoothly enough to chart, and it maps onto valuation multiples that investors apply directly.

That last point is why it is quoted so heavily and why it is also occasionally stretched: annualising a strong quarter, or counting revenue that is not contractually recurring, both inflate it in ways that are difficult to detect from outside.

For an operator rather than an investor, the more useful pair is MRR movement and net revenue retention. Those two describe whether the business is growing and whether it holds what it wins, which is what actually determines where the ARR figure goes next.

Contracted ARR and live ARR differ for any business with future-dated starts or scheduled uplifts, and the gap matters when the figure is being used for planning rather than for headlines.

Stating which is being quoted removes a recurring ambiguity, particularly in businesses where sales and finance report different numbers for the same period.

Multi-year contracts are worth annualising rather than counting at full value, since a three-year deal is three years of ARR rather than a single large number.

Businesses that count the total contract value as ARR overstate it by the contract length, which is a large distortion in enterprise-heavy books.

Comparing ARR growth against headcount growth is a useful efficiency check, since revenue per employee is one of the few figures that stays comparable across very different subscription businesses.

Stating whether the figure includes or excludes usage-based revenue matters for any business with a consumption component, since that portion is recurring in practice and not contracted.