The short answer
Annual recurring revenue (ARR) is the annualized value of a company's recurring subscription or contract revenue. For monthly subscriptions it's usually MRR × 12. It excludes one-time fees such as setup, services and hardware.
- ARR measures recurring revenue on a yearly basis.
- For monthly plans, ARR is typically MRR × 12.
- Exclude one-time fees and non-recurring services.
- Show how ARR is built: new, expansion and churned revenue.
How to calculate it
Add up the annual value of all active recurring contracts. If customers pay monthly, multiply current MRR by 12. Only count signed, active, recurring revenue; leave out one-time implementation fees, consulting and pilots that haven't converted to a contract.
Worked example (hypothetical)
| Item | Amount | Counts toward ARR? |
|---|---|---|
| 12 customers at $1,500/month | $18,000 MRR | Yes: $216,000 |
| 2 annual contracts at $24,000/year | $48,000/year | Yes: $48,000 |
| Setup fees collected this quarter | $15,000 | No |
| Total ARR | $264,000 |
Why it matters to a pre-seed or seed founder
For B2B SaaS, ARR is the headline traction number, and investors check it in diligence against contracts and bank records. Define it conservatively and consistently, and show the movement behind it: new customers, upgrades and churn. Overstated ARR found in diligence can end a round. See traction metrics by stage and B2B SaaS investors.
Frequently asked questions
Is ARR the same as annual revenue?
No. ARR counts only recurring revenue, annualized. Total revenue also includes one-time fees and services.
Should pilots count as ARR?
Only once they're signed, recurring contracts. Label paid pilots separately.
How do I show ARR growth?
Break it into new, expansion, contraction and churned ARR each month or quarter.