What is annual recurring revenue (ARR)? Meaning and formula
- What is annual recurring revenue (ARR)?
- How to calculate ARR
- Types of recurring revenue
- ARR calculation examples
- Common ARR mistakes to avoid
- How to grow your ARR
- Take control of your finances with Ramp
Annual recurring revenue (ARR) is the predictable yearly revenue your business earns from active subscriptions. It shows how much revenue you can count on over a full year, whether you bill monthly or annually. ARR helps you evaluate financial stability, forecast long-term performance, and track how upgrades, downgrades, and churn affect growth.
What is annual recurring revenue (ARR)?
Annual recurring revenue (ARR) is the predictable subscription revenue your business earns each year. It reflects the value of active contracts normalized to a yearly period, giving you a clear view of stable, recurring income. Subscription-based companies rely on ARR to understand long-term revenue stability. It helps you evaluate performance, spot trends, and plan for growth across both B2C and B2B models.
Why ARR is important for SaaS businesses and subscription-based models
ARR helps you understand how much revenue you can depend on each year. This clarity makes it easier to plan and manage spend, set goals, and build long-term financial models. It also offers a straightforward way to track growth. Shifts in upgrades, downgrades, and cancellations show where your business is gaining traction and where customer experience may need improvement.
Investors often look at ARR to understand the durability of your business model. Strong ARR signals predictable revenue, which supports better valuations and more confident planning.
How to calculate ARR
Calculate ARR by adding the subscription revenue you earn from current and new customers and then adjusting for upgrades, downgrades, and cancellations. This gives you a single number that reflects predictable revenue over a full year.
You can calculate ARR using a simple formula:
ARR = Renewal revenue + New customer revenue + Expansion revenue – Revenue loss from churn – Revenue loss from contraction
Components of the ARR formula
- Renewal revenue: Revenue you receive from existing customers who renew their contracts
- New customer revenue: Revenue from customers who sign a new subscription
- Expansion revenue: Revenue from upgrades, add-ons, or higher-tier plans
- Revenue loss from churn: Revenue lost when customers cancel their subscriptions
- Revenue loss from contraction: Revenue lost when customers downgrade to lower-priced plans
Types of recurring revenue
Recurring revenue comes from subscription activity that repeats on a predictable schedule. Understanding each type helps you calculate ARR accurately and identify where revenue is growing or declining.
Subscription revenue
Subscription revenue includes renewals from existing customers and new sales added during the year. These contracts form the base of your recurring revenue. You can track changes in subscription revenue by monitoring renewal rates and retention metrics.
Expansion revenue
Expansion revenue comes from customers who increase their annual spend. This might include moving to higher-tier plans or adding recurring features. If you offer recurring add-ons, include them in expansion revenue and exclude any one-time fees.
Lost revenue
Lost revenue reflects the annual value you lose when customers downgrade or cancel. Downgrades reduce the contract amount, while cancellations remove the subscription entirely. Tracking both helps you understand churn and its impact on long-term revenue stability.
ARR calculation examples
To calculate ARR, start by identifying your recurring subscription revenue, then add any new or expanded contracts and subtract revenue lost from downgrades or cancellations. These examples show how ARR works for different billing models.
How to calculate ARR from monthly subscriptions
If you charge customers monthly, find your monthly recurring revenue (MRR) first and convert it into an annual amount.
- Renewal revenue: 500 customers renew at $20 per month, adding $10,000 of MRR
- New customer revenue: 120 new customers join at $20 per month, adding $2,400 of MRR
- Expansion revenue: 50 customers upgrade, adding $5 per month each, for $250 of MRR
- Revenue loss from churn: 40 cancellations reduce MRR by $800
- Revenue loss from contraction: 30 downgrades reduce MRR by $120
The caluclation looks like this:
- MRR = $10,000 + $2,400 + $250 – $800 – $120 = $11,730
- ARR = $11,730 * 12 = $140,760
How to calculate ARR from yearly subscriptions
If you bill customers annually, you can calculate ARR directly from contract values.
| ARR component | Standard | Platinum | Total |
|---|---|---|---|
| Renewal revenue | 600 * $500 = $300,000 | 12 * $20,000 = $240,000 | $540,000 |
| New customer revenue | 100 * $500 = $50,000 | 3 * $20,000 = $60,000 | $110,000 |
| Expansion revenue | $12,000 | $50,000 | $62,000 |
| Revenue loss from churn | 40 * $500 = $20,000 | 1 * $20,000 = $20,000 | –$40,000 |
| Revenue loss from contraction | $6,000 | $25,000 | –$31,000 |
ARR = $540,000 + $110,000 + $62,000 – $40,000 – $31,000 = $641,000
Common ARR mistakes to avoid
Small errors in ARR calculations can create misleading forecasts or distort performance metrics. These are the issues that most often cause inaccurate results.
Mistaking ARR for cash flow
ARR reflects predictable revenue, not money collected. If you include ARR in the wrong financial statement, you may misread the timing of cash movements and confuse profit with billing activity. Treat ARR as income and report it only in your income statement or P&L.
Neglecting discounts
Discounted subscriptions change the actual value of recurring revenue. If you calculate ARR using full-price contract values, you may overestimate revenue and miss the true average recurring rate. Adjust ARR to include discounted contract amounts.
Including late payments
Late payments do not count as recurring revenue. Customers who have not paid their annual contract on time should be included in lost revenue until payment is received. This helps you maintain an accurate picture of reliable annual income.
Adding non-recurring revenue
One-time fees, non-recurring add-ons, and professional services do not contribute to ARR. Mixing these with recurring charges inflates ARR and creates unrealistic expectations for future revenue.
Confusing ARR and MRR
ARR measures predictable revenue over a full year, while MRR focuses on month-to-month trends. If you use the wrong metric to evaluate performance or make decisions, you may misinterpret growth patterns or fail to spot short-term changes that affect retention or expansion.
How to grow your ARR
Growing ARR depends on improving retention, encouraging upgrades, and managing the cost of acquiring new customers. These strategies help you strengthen recurring revenue over time.
Reduce customer acquisition cost (CAC)
Acquiring customers becomes less sustainable when marketing and sales costs rise faster than subscription revenue. To improve ARR, compare your recurring revenue to CAC and look for opportunities to reduce spend or increase efficiency. Lower acquisition costs give you more room to grow long-term contract value.
Increase retention and customer lifetime value (LTV)
Retention is one of the most reliable drivers of ARR growth. You can strengthen LTV by improving onboarding, addressing common support issues, or personalizing the customer experience. Small gains in retention often compound and lead to meaningful increases in recurring revenue.
Consider new upgrades to incentivize engagement
Thoughtful upgrades or added features can motivate existing customers to increase their annual spend. This might include new pricing tiers, added functionality, or recurring add-on services. Review how customers use your product and identify opportunities where expanded features provide clear value.
Take control of your finances with Ramp
It can be incredibly challenging to parse recurring revenue data and prepare financial statements using outdated technologies or accounting processes. Consider where financial accounting efforts can be improved, or tools like automation can streamline management and eliminate human error.
Subscription businesses and SaaS companies need effective ways to manage high volumes of financial data and recurring electronic transactions. Ramp helps SaaS startups and small subscription businesses simplify expense management and improve profitability with a platform built for finance automation and control. In a complex financial environment, Ramp makes it easy to manage spending, streamline accounting, and track recurring revenue.
Key features include:
- Automated invoice reconciliation to reduce errors and save time
- Automatic categorization of transactions for easier ARR tracking
- Customizable spend controls to prevent overspending and enforce policies
Discover how Ramp’s expense management systems can help you take control of recurring funds and your finances.
FAQs
In finance, ARR typically refers to the accounting rate of return. This is a separate metric from annual recurring revenue and used to weigh the net profit of an investment against its initial cost.
Annual run rate, or revenue run rate, is a predictive metric that estimates future earnings based on a business’s annual revenue. Run rate does not factor in variables like churn rate, and may be used by any revenue generating business, whereas ARR is typically only utilized by subscription or contract-based organizations.
Overall, monthly recurring revenue (MRR) utilizes the same formula as ARR but is applied to a monthly rather than annual billing period. Both are important metrics and are often leveraged equally by subscription businesses.
A “good” annual recurring revenue (ARR) depends on your company’s stage and industry, but early-stage startups often aim to hit $1–$3 million ARR as a milestone for product-market fit. For growth-stage SaaS companies, $10 million+ ARR is typically considered strong and can attract serious investor interest. Ultimately, healthy ARR growth, low churn, and strong unit economics matter more than the absolute number.
To calculate ARR from monthly data, multiply your monthly recurring revenue (MRR) by 12. For example, if your MRR is $10,000, your ARR would be $10,000 × 12 = $120,000. Just make sure to use only predictable, recurring revenue in your MRR calculation.
To convert ARR to recognized revenue, spread it evenly over the contract period—typically monthly for annual contracts. For example, if a customer pays $12,000 for a 12-month subscription, you’d recognize $1,000 in revenue per month. ARR reflects the full contracted amount, while recognized revenue is recorded as it’s earned over time.
“Ramp gives us one structured intake, one set of guardrails, and clean data end‑to‑end— that’s how we save 20 hours/month and buy back days at close.”
David Eckstein
CFO, Vanta
“Ramp is the only vendor that can service all of our employees across the globe in one unified system. They handle multiple currencies seamlessly, integrate with all of our accounting systems, and thanks to their customizable card and policy controls, we're compliant worldwide.” ”
Brandon Zell
Chief Accounting Officer, Notion
“When our teams need something, they usually need it right away. The more time we can save doing all those tedious tasks, the more time we can dedicate to supporting our student-athletes.”
Sarah Harris
Secretary, The University of Tennessee Athletics Foundation, Inc.
“Ramp had everything we were looking for, and even things we weren't looking for. The policy aspects, that's something I never even dreamed of that a purchasing card program could handle.”
Doug Volesky
Director of Finance, City of Mount Vernon
“Switching from Brex to Ramp wasn’t just a platform swap—it was a strategic upgrade that aligned with our mission to be agile, efficient, and financially savvy.”
Lily Liu
CEO, Piñata
“With Ramp, everything lives in one place. You can click into a vendor and see every transaction, invoice, and contract. That didn’t exist in Zip. It’s made approvals much faster because decision-makers aren’t chasing down information—they have it all at their fingertips.”
Ryan Williams
Manager, Contract and Vendor Management, Advisor360°
“The ability to create flexible parameters, such as allowing bookings up to 25% above market rate, has been really good for us. Plus, having all the information within the same platform is really valuable.”
Caroline Hill
Assistant Controller, Sana Benefits
“More vendors are allowing for discounts now, because they’re seeing the quick payment. That started with Ramp—getting everyone paid on time. We’ll get a 1-2% discount for paying early. That doesn’t sound like a lot, but when you’re dealing with hundreds of millions of dollars, it does add up.”
James Hardy
CFO, SAM Construction Group
