ARR / MRR (Annual / Monthly Recurring Revenue)

ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue) are the two ways subscription businesses summarize the run-rate revenue of their currently-active contracts. They exclude one-time fees, professional services, and any revenue that isn't expected to recur.

ARR vs MRR — what's the difference?

Mathematically, ARR = MRR × 12. They describe the same thing on different time scales. The choice of which to report is a function of company stage and contract structure.

Metric	Definition	Best for
MRR	Recurring revenue from active subscriptions, summed monthly	Early-stage SaaS with monthly or small-deal contracts
ARR	Recurring revenue annualized (committed contract value)	Mid-market + enterprise SaaS with annual contracts

Most companies switch from MRR to ARR reporting once they cross $1M in revenue and contracts shift to annual. Some report both.

What's included in ARR/MRR

• Active subscription contracts, at their committed contract value, annualized
• Add-ons and seat expansions priced as part of the subscription
• Renewals at their new contract value (not last year's)

Excluded:

• Setup fees, one-off implementation, professional services
• Usage-based overages (unless the overage itself is a recurring commitment)
• Cancelled or expired contracts (drop out the day they end, not when discovered)
• Trial accounts (until they convert to paid)

How ARR changes — the ARR walk

Track ARR by its four components — the ARR walk:

Component	Definition
New ARR	From new customers acquired this period
Expansion ARR	From existing customers upgrading (more seats, higher tier, add-ons)
Contraction ARR	From existing customers downgrading (fewer seats, lower tier)
Churned ARR	From customers cancelling entirely

Net New ARR = New + Expansion − Contraction − Churn

A healthy subscription business has Net New ARR > 0 every quarter. A great one has Expansion alone > Contraction + Churn — the foundation of net revenue retention (NRR) > 100%.

ARR walk example

A SaaS company starts the quarter at $10M ARR. During the quarter:

• New: +$1.2M (new customers)
• Expansion: +$0.5M (existing seat upgrades)
• Contraction: -$0.1M (one customer downgraded)
• Churn: -$0.3M (two customers cancelled)

Net New ARR = $1.2M + $0.5M − $0.1M − $0.3M = $1.3M

End-of-quarter ARR = $10M + $1.3M = $11.3M (13% QoQ growth, ~63% annualized run-rate).

If Expansion ($0.5M) > Contraction + Churn ($0.4M), NRR > 100% — a strong signal.

Common ARR/MRR mistakes

Mistake	Why it happens	Fix
Counting one-time fees as ARR	Inflates the headline number	Setup fees + PS are not ARR
Including unsigned proposals	Pipeline padding	Only signed contracts count
Reporting "bookings ARR" without distinguishing	Bookings ≠ recognized recurring	Report ARR (committed, active) separately from bookings
Not removing churned ARR immediately	Lag inflates ARR	Drop on the day the contract ends
Annualizing monthly subs as ARR	Inflates non-committed revenue	Monthly subs are technically not annual commitments — disclose mix

ARR multiples and valuation

Public SaaS companies trade on multiples of forward ARR. Approximate ranges in mid-2026:

Growth + Profitability	EV/ARR Multiple
Rule of 40 > 60 with NRR > 130%	12-18×
Rule of 40 = 40 with NRR 110-120%	6-10×
Rule of 40 < 20 or NRR < 100%	3-5×

Private valuations track public multiples with a lag and a discount. ARR is the denominator on almost every SaaS valuation conversation.

Related

• Burn Rate — paired with ARR to compute Burn Multiple
• Churn — the rate at which ARR leaks
• NRR — net revenue retention; >100% means the existing customer base alone grows ARR
• LTV — total expected ARR contribution per customer
• Rule of 40 — growth + profitability benchmark for SaaS