ARR (annual recurring revenue) is the yearly value of the recurring subscription and contract revenue you have under contract today, most often calculated as MRR × 12. It deliberately leaves out one-time revenue such as setup fees, services and hardware, which is what makes it the headline growth metric for subscription businesses.
What is ARR?
ARR measures the recurring revenue elements of a business over a year: subscriptions, contracts and any other regular revenue stream, and can be calculated as MRR × 12 or by annualizing each customer’s monthly or quarterly payment.1Source 1 · StripeWhat is annual recurring revenue (ARR)? A guide for SaaS businessesstripe.com It is a snapshot, not a forecast. If every active customer kept paying exactly what they pay today for twelve months, ARR is what you would collect from those contracts.
ARR=MRR × 12 = Σ (annualized recurring value of each active contract)
- MRR
- Monthly recurring revenue, normalized to one month across all billing periods
- Annualized value
- Monthly payment × 12, or quarterly payment × 4, or the annual contract value
Worked example
| Revenue line | Customers | Recurring? | Contribution to ARR |
|---|---|---|---|
| Monthly plan at $500 / month | 120 | Yes | $720,000 |
| Annual plan at $9,600 / year | 30 | Yes | $288,000 |
| Onboarding fees this year | 25 | No | $0 |
| Total ARR | 150 | $1,008,000 |
Month to month, ARR moves through four components: new ARR from new customers, expansion from upgrades, churn from cancellations (a negative number), and contraction from downgrades. Their sum is net new ARR, the figure investors divide burn by to get the burn multiple.3Source 3 · David Skok, For EntrepreneursSaaS Metrics 2.0 – A Guide to Measuring and Improving What Mattersforentrepreneurs.com
Is ARR the same as annualized run rate?
No, even though both get abbreviated “ARR.” Annualized run rate projects a full year of revenue from a shorter period and includes every revenue type, while annual recurring revenue counts only recurring revenue from active contracts and subscriptions.2Source 2 · StripeWhat is annualized run rate (ARR)? How to calculate ARR and use it strategicallystripe.com A services-heavy month can inflate run rate without changing ARR at all. Say which one you mean on every board slide.
Common mistakes
- Counting signed-but-not-live contracts without labelling them. Keep “contracted ARR” separate from “live ARR.”
- Including usage overages that are not committed. Report them as a separate line or use a trailing average you define in writing.
- Ignoring discounts. A 30% first-year discount means ARR should reflect the discounted price until it expires.
- Mixing currencies at spot rates without disclosing it, so FX swings look like growth or churn.
How to track ARR in Kimo
Connect your billing system (Stripe, Paddle) and CRM (HubSpot or Salesforce), then define ARR once as a measure in your data model. The SaaS metrics template ships an ARR bridge (starting, new, expansion, contraction, churn, ending) that feeds the revenue view and your board deck, so every chart uses the same definition.
Frequently asked questions
Should one-time setup fees be included in ARR?
When should a company switch from MRR to ARR?
Can ARR go down even if revenue goes up?
Sources
3 references- What is annual recurring revenue (ARR)? A guide for SaaS businesses (opens in a new tab)Stripestripe.com
Definition of ARR and the ARR = MRR × 12 calculation.
- What is annualized run rate (ARR)? How to calculate ARR and use it strategically (opens in a new tab)Stripestripe.com
Run rate extrapolates all revenue from a shorter period; recurring revenue counts only recurring contracts.
- SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters (opens in a new tab)David Skok, For Entrepreneursforentrepreneurs.com
New, expansion and churned ARR summing to net new ARR.
External sources were accessed at the time of writing. Kimo product details, customers and figures in examples are illustrative unless a source is cited.
