What Is ARR? How to Calculate Annual Recurring Revenue — ARR Bridge, CARR and Bookings Explained

What is ARR? (Short answer)

ARR (Annual Recurring Revenue) is the annualised value of all recurring subscriptions and contracts that are active on a specific date. B2B SaaS companies, enterprise software vendors and any business selling annual licences describe their size and growth in ARR.

Formula: ARR = Σ (annual recurring value of every active contract). If every customer is on a monthly plan, ARR = MRR × 12. The key point: ARR is not the cash collected or the revenue booked over a year. It answers 'if nothing changed in today's customer base, how much recurring revenue would it produce over the next 12 months?'.

All amounts in this article are example figures for one fictional B2B SaaS company. For monthly movements and the Quick Ratio, see the MRR guide; for the short comparison, see ARR vs MRR; to run your own numbers, use the ARR Calculator.

How to calculate ARR: a contract-by-contract example

On 31 December 2026 the example company has 144 active customers on three contract types. ARR is the sum of each contract's annual recurring value; one-off items and usage overages stay out.

Total: $302,400 + $397,600 + $140,000 = $840,000 ARR. Average ARR per customer (average contract value, ACV) is $840,000 / 144 ≈ $5,833. The monthly equivalent (MRR) is $840,000 / 12 = $70,000.

• Monthly plan ($300/month): 84 customers × $300 × 12 = $302,400
• Annual contracts: 50 customers, annual values totalling $397,600 (average ≈ $7,952)
• Three-year ramp contracts ($14,000 → $18,000 → $22,000 per year; currently in year 1): 10 × $14,000 = $140,000
• Excluded: $45,000 of setup/integration fees invoiced this year and $2,500 of December usage overage

What counts toward ARR — and what doesn't?

The rule mirrors MRR: revenue that will repeat under contract even if the customer does nothing is ARR; anything one-off or uncertain is not. The difference is that annual and multi-year contracts carry far more weight in ARR, and that is where most mistakes happen.

• Include: monthly plans annualised; annual contracts at their annual value; continuously billed add-ons and seat packs
• Include at the price actually paid: discounted contracts (not list price)
• Include up to the commitment: the committed annual minimum in usage-based contracts
• Exclude: setup, training, consulting and integration fees; one-off licence sales
• Exclude: usage above the commitment — track it separately as usage run-rate
• Exclude: free trials and freemium users; signed contracts that have not started yet (those belong in CARR)

How do multi-year and ramp contracts affect ARR?

Booking a multi-year deal's total contract value (TCV) into one year's ARR is the crudest error: a $54,000 three-year contract does not add $54,000 of ARR. A subtler error is dividing TCV by the number of years.

The example ramp contracts are $14,000 in year one, $18,000 in year two and $22,000 in year three. Using TCV / 3 = $18,000 puts 10 contracts into ARR at $180,000, while customers actually pay $14,000 a year today. The $40,000 gap pulls future price steps into the present. The more conservative and common approach is to use the current year's value and record each step-up as expansion ARR when it takes effect.

• Flat multi-year contract: ARR = annual value (same as TCV / years)
• Ramp contract: ARR = the current year's value; step-ups are expansion in the year they start
• First-year discount: ARR = discounted value; when the discount ends, tag the uplift as 'discount roll-off', not upsell
• Multi-year amount paid upfront: large in cash, no change to ARR

What is an ARR bridge? New, expansion, contraction and churned ARR

Total ARR doesn't show where growth came from. So the difference between the opening and closing balance of a year (or quarter) is split into four movements — the ARR bridge or ARR waterfall. The example company started 2026 with 120 customers and $600,000 ARR.

Bridge: $600,000 + $228,000 + $102,000 − $24,000 − $66,000 = $840,000. Net new ARR = New + Expansion − Contraction − Churn = $240,000; annual ARR growth = $240,000 / $600,000 = 40%. Customers: 120 + 38 − 14 = 144.

• New ARR: 38 customers who signed and started during the year — $228,000 (including 10 ramp deals × $14,000 = $140,000)
• Expansion ARR: upgrades, extra seats/modules and price increases from existing customers — $102,000
• Contraction ARR: downgrades, fewer seats, discounts at renewal — $24,000
• Churned ARR: ARR of the 14 customers who cancelled or did not renew — $66,000

Is ARR growth healthy? NRR and GRR from the bridge

The same bridge produces two ratios that show whether growth comes from new sales or from the existing base. Both use only customers present at the start of the period; new customers are excluded.

Reading: the existing base didn't shrink — it grew slightly (NRR 102%). But GRR of 85% means 15% of opening revenue leaked through contraction and churn, and expansion only just covers it. With 95% of net new ARR ($228,000 / $240,000) coming from new logos, growth will drop quickly in any year new sales slow. Read growth against profitability with the Rule of 40, and unit economics with CAC and LTV.

• NRR = (Opening + Expansion − Contraction − Churn) / Opening = $612,000 / $600,000 = 102%
• GRR = (Opening − Contraction − Churn) / Opening = $510,000 / $600,000 = 85%; it can never exceed 100% because expansion is excluded
• Annual logo churn = Churned customers / Opening customers = 14 / 120 ≈ 11.7%
• New-logo share of gross adds = New / (New + Expansion) = $228,000 / $330,000 ≈ 69%

ARR vs CARR vs run-rate vs bookings vs revenue

These five terms are the most frequently mixed up in board decks and investor calls, and they produce five different numbers for the same company. Here are the example company's figures on 31 December 2026; always state which one you report and how it is defined.

Run-rate revenue is higher than ARR because December's $6,000 setup fees and $2,500 usage overage were also multiplied by 12: ($70,000 + $6,000 + $2,500) × 12 = $942,000. Annualising a month that contains one-off items is misleading, which is why ARR only takes the recurring part.

• ARR: annualised value of recurring contracts active on 31 December — $840,000
• CARR (contracted ARR): ARR + signed contracts not yet live (3 customers starting in February, $42,000) − contracts with a cancellation/non-renewal notice (2 customers, $15,000) = $867,000
• Run-rate revenue: the last month's total revenue × 12, one-offs included — $942,000
• Bookings (TCV): total value of contracts signed during the year, including all three years of the 10 ramp deals ($540,000) — $628,000
• Recognised subscription revenue for the year: assuming ARR rose linearly from $600k to $840k, ≈ $720,000; the actual accounting figure depends on billing and start dates

How should ARR be reported across currencies?

If you price in one currency and report in another, exchange-rate moves change ARR without a single sale. €400,000 of ARR is $440,000 at an example rate of 1.10 and $480,000 at 1.20 — a 9% 'increase' that is purely FX.

Fix: report ARR in the billing currency and at a constant (period-opening) rate, and show the FX effect as its own line in the bridge. In high-inflation markets, also tag price increases separately inside expansion ARR, otherwise expansion looks like product adoption.

The most common ARR mistakes

Most broken ARR reporting fails on definitions, not arithmetic. Write the definition down once and apply it every period so the numbers stay comparable.

• Treating ARR as the sum of revenue earned during the year (ARR is a point-in-time snapshot)
• Booking a multi-year TCV into one year, or averaging a ramp deal as TCV / years
• Adding setup, consulting or usage overage, or annualising a month that contains one-off revenue
• Counting signed-but-not-started contracts as ARR (that's CARR)
• Reporting only the total and never showing the new / expansion / contraction / churn bridge
• Presenting FX or inflation-driven price changes as growth