Annual Recurring Revenue (ARR)
The value of contracted subscription revenue normalised to a year — recurring only, excluding one-off fees.
ARR is the annualised value of subscriptions currently in force. The word doing the work is recurring: implementation fees, professional services, usage overages and one-off charges do not belong in it, however much revenue they represent. Including them is the most common way ARR gets inflated, and it misleads exactly the audience — investors, boards — that the number exists for.
It is a snapshot of contracted run-rate, not a forecast and not revenue recognised. The useful reporting breaks it into components: new ARR from new customers, expansion from existing ones, contraction from downgrades, and churned ARR from cancellations. Net new ARR is those four combined, and it tells you far more than the headline figure — a company with flat ARR and heavy churn offset by heavy acquisition is in a very different position from one that is simply flat.
In practice
A company reported €4.2m ARR including €900k of implementation fees. Diligence stripped them out, leaving €3.3m, and separately found that expansion was negative — existing customers were downgrading and new logos were covering it. The headline had been flat-to-growing for three quarters while the underlying business contracted.
Where teams get it wrong
- Including one-off services and implementation fees.
- Reporting a single figure with no new, expansion, contraction and churn breakdown.
- Counting signed contracts that have not started.
- Annualising a single strong month.
- Treating ARR as recognised revenue, which it is not.
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Related terms
All terms- Monthly Recurring Revenue (MRR)Normalised monthly subscription revenue — and, broken into its movements, the clearest monthly read on whether a business is growing.
- Net Revenue Retention (NRR)Revenue from existing customers this period against the same cohort a year ago, including expansion, contraction and churn — but no new customers.
- ChurnThe rate at which customers stop paying or stop using a product over a given period — the mirror image of retention.
- Lifetime Value (LTV)The total gross profit a customer is expected to generate before they leave — the ceiling on what acquiring them can be worth.