How to calculate ARR
The simplest route: take your MRR and multiply it by twelve. MRR already spreads annual plans across their months and leaves out one-off charges, so ARR inherits the same rules.
Businesses that sell mostly annual or multi-year contracts often build ARR from the contracts instead: the annual value of each active contract, added up. A three year contract worth $90,000 in total contributes $30,000 of ARR, not $90,000. Counted correctly, both routes land on the same figure.
ARR = MRR × 12
Worked example
The same company as in the MRR example: 40 customers at $50 a month, 10 customers at $1,200 a year, and a $500 setup fee charged this month.
- Monthly plans: 40 × $50 × 12
- $24,000
- Annual plans: 10 × $1,200
- $12,000
- Setup fee (does not repeat)
- $0
- ARR
- $36,000
The same answer as $3,000 of MRR × 12.
Why ARR matters
ARR is the headline number for businesses that sell annual contracts, and it is the figure investors, acquirers and lenders usually ask for, because it states the size of a subscription business in a unit they can compare across companies.
It is also a planning number. Hiring, spending and targets are usually set per year, and ARR tells you the recurring base you start the year with before any new sale.
Common mistakes
- Treating ARR as this year's revenue ARR is a snapshot of the recurring run rate today. The revenue you actually earn over the year will differ, because customers join, upgrade and leave during it.
- Counting the full value of a multi-year deal Only one year's worth of a multi-year contract belongs in ARR.
- Including services and one-off revenue Implementation fees, consulting and hardware are not recurring. If they slip in, ARR overstates the base you can count on.
- Annualizing a single strong month Multiplying one month's total revenue by twelve is a revenue run rate, not ARR, and it misleads whenever that month held one-off charges or annual renewals.