ARR meaning — Annual Recurring Revenue

What is ARR?

ARR (Annual Recurring Revenue) is the total predictable revenue a subscription business earns in a year from active contracts. It counts only recurring revenue: subscriptions in, professional services and one-off fees out. ARR is the headline number investors and boards track, because it is the closest thing a software business has to a stable base. What matters more than the level is the composition of its movement — new ARR from new customers, expansion from existing ones, contraction from downgrades and churn from cancellations. Two companies growing ARR 40% look identical until you see that one did it on 15% churn and heavy new-logo spend while the other did it on 120% net revenue retention. The second is worth several times the first.

When to use ARR

• Board reporting and fundraising
• Comparing growth across periods on a like-for-like basis
• Setting annual quota and headcount plans

Real examples

• 200 customers at a $25K average ACV = $5M ARR.
• Movement: +$1.2M new, +$600K expansion, -$200K contraction, -$400K churn = $1.2M net new ARR.
• MRR of $420K × 12 = $5.04M ARR.

Common mistakes

• Including one-off services revenue, which is not recurring and should never sit in ARR.
• Reporting gross new ARR without churn, which hides a leaking bucket.
• Counting signed-but-not-started contracts alongside live revenue.

Want to practice ARR live? Run a roleplay with an AI buyer.