What is Annual Recurring Revenue (ARR)?

ARR is the annualized value of all active subscription contracts. It includes revenue from new customers, renewals, and expansions — but excludes one-time fees, professional services, and usage-based revenue unless it’s recurring.

Basic Formula:

ARR = Σ (Contracted recurring revenue per customer × 12 months)

Or, if you already calculate MRR:

ARR = MRR × 12

ARR gives a standardized, forward-looking view of your subscription business across the entire year — making it ideal for strategic planning, sales goal-setting, and forecasting.

Why It Matters in B2B SaaS

• It’s the strategic version of MRR. ARR helps sales teams understand long-term deal value, not just this month’s contribution.
• It’s how most enterprise deals are quoted and tracked. Especially for AEs selling to mid-market or enterprise, ARR aligns better with how customers negotiate budgets and contract terms.
• It sets the foundation for annual quotas and territory plans. ARR is commonly used in comp plans, rep scorecards, and sales forecasts.
• It’s a must-have metric in boardrooms and investor decks. Growth in ARR is a key indicator of business momentum — especially when segmented by new, expansion, and churn.

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How to Measure ARR

Step 1: Identify all active, recurring contracts — monthly and annual

Step 2: Normalize each to a yearly value

    For monthly contracts, multiply by 12

    For multi-year deals, use the annualized portion

Step 3: Exclude one-time charges, usage overages (unless recurring), and services

Step 4: Sum the annual contract value (ACV) across all customers

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Best Practices

• Segment ARR by customer type or region to understand where growth is coming from
• Track ARR growth by rep, segment, and product line for better planning
• Use ARR to compare deal quality — a $10K logo vs. a $100K enterprise deal can have vastly different GTM implications
• Make sure ARR definitions are consistent across Sales, RevOps, and Finance