ARRAnnual Recurring Revenue
By Federico Donatone · Updated October 15, 2026ARR (annual recurring revenue) is the yearly value of all active subscription and contract fees a company expects to repeat, normalized to a 12-month period. It counts only recurring fees, not one-time setup, services or usage spikes. B2B software companies use annual recurring revenue to size the business, track growth and plan hiring.
How to calculate annual recurring revenue
Start from contracts, not invoices. For each active customer, take the recurring amount they are committed to pay, convert it to a yearly figure, and add everything up. Monthly plans are multiplied by 12. Multi-year contracts are divided by the number of years.
ARR = Sum of the annual recurring fee of every active customer (or MRR × 12)For example, if 30 customers pay $2,000 a month and 5 customers have $60,000 annual contracts, ARR is (30 × $2,000 × 12) + (5 × $60,000) = $720,000 + $300,000 = $1,020,000.ARR moves for four reasons. Track them apart, because each one has a different owner:
- New ARR: contracts from customers who were not paying before.
- Expansion ARR: upgrades, extra seats or new products sold to existing customers.
- Contraction ARR: downgrades and smaller renewals.
- Churned ARR: customers who cancel or do not renew.
What counts in ARR and what does not
| Revenue item | In ARR? | Why |
|---|---|---|
| Subscription fees, monthly or annual | Yes | Committed and repeating |
| Multi-year contract | Yes, per year | Total value divided by contract years |
| One-time setup or onboarding fee | No | It will not repeat |
| Professional services | No | Paid per project |
| Usage above a committed minimum | Usually no | Not contracted, so it may not repeat |
| Signed contract not yet live | Track apart | Often reported as contracted ARR |
Write your ARR rules down once: when a contract starts counting, how discounts and free months are treated, and when a customer who has not renewed drops out. Then keep them. It is the same principle we apply to pipeline in the B2B Outbound Evidence Standard: when a definition changes, you have a new metric, not a better quarter.
ARR vs MRR vs revenue
MRR (monthly recurring revenue) is the same number on a monthly scale. Companies with mostly annual contracts tend to report ARR. Companies with monthly plans watch MRR, because it reacts faster.
ARR is not the revenue in your accounts. Accounting revenue follows rules about when a service is delivered. ARR is an operating snapshot: what repeats over the next year if nothing changes. It is not pipeline either. An open opportunity, even a late-stage one, adds nothing to ARR until the contract is signed and live.
How sales teams plan backward from ARR
An ARR target becomes a sales plan when you walk it back through the funnel, one rate at a time:
- Set the new ARR target for the year.
- Divide it by your average annual contract value to get the number of new deals.
- Divide deals by your win rate to get the qualified opportunities you need.
- Divide opportunities by your meeting to opportunity rate to get held meetings.
- Divide held meetings by your show rate to get the meetings you must book.
The last step is the one most plans skip. For companies selling $50K+ contracts, a few missing deals move ARR a lot, which is why our GTM consulting work plans from target accounts and held meetings, not from lead volume.
Run the same chain for the base you already have. Expected churned ARR has to be replaced before any new ARR counts as growth, so a company losing customers needs a bigger new business target than its headline goal suggests.