Key takeaways
- ARR is a snapshot of recurring subscription value, not revenue in the accounts.
- MRR is the monthly version; most companies pick one as their main measure.
- Setup fees, consulting and one-off training stay out of ARR.
- Count contracts at the price the customer actually pays, after discounts.
What is the annual recurring revenue formula
The annual recurring revenue formula adds up the yearly value of every active subscription. For monthly plans that is the monthly charge times twelve; for multi-year contracts it is the total contract value divided by the number of years.
With illustrative figures: a customer on a three-year contract worth 90,000 in total adds 30,000 to ARR. A customer paying 500 a month adds 6,000. A one-off 2,000 setup fee for either adds nothing.
What counts as recurring revenue
Recurring revenue is money a customer has agreed to pay again and again for as long as the subscription runs. The test is whether you would expect the charge next period without a new sale.
- Counts: subscription fees for plans, seats and recurring add-ons.
- Counts: committed minimum usage written into the contract.
- Does not count: setup, implementation and one-off training fees.
- Does not count: professional services and consulting projects.
- Track separately: signed contracts that have not started yet.
ARR vs MRR: which should you use
Use MRR when most customers pay monthly and change plans often, and ARR when most sign annual or multi-year contracts. Both come from the same data, so the choice is about which view the business reads more easily.
MRR shows changes faster, which suits a young company watching each month. ARR smooths over monthly noise and matches how larger contracts are signed and renewed.
Why ARR matters in SaaS
ARR matters in SaaS because it shows the size of the business you can count on before winning another customer. Plans for hiring, spending and sales targets are usually set against it, and investors ask for it first.
It is not cash, and it is not the revenue an accountant recognises. A customer can be in ARR while their invoice is unpaid, which is why finance tracks both.
What are common ARR counting mistakes
The common mistakes all make ARR look bigger than the business really is. Each is easy to avoid once the rule is written down.
- Counting bookings, or the full value of multi-year deals, as one year.
- Including one-off fees because they arrived on the same invoice.
- Using list prices instead of what the customer pays after discounts.
- Leaving cancelled customers in until their contract formally ends, without saying so.
Where Pebbles Ai fits
Common questions
Is ARR the same as revenue?
No. Revenue in the accounts follows accounting rules and includes one-off income; ARR is a forward-looking measure of recurring subscription value only.
Do monthly plans count towards ARR?
Yes, at their monthly charge times twelve, as long as the customer is active. Many teams with mostly monthly plans report MRR instead.
When should a company report ARR instead of MRR?
Once most revenue comes from annual or longer contracts. At that point a monthly figure mostly reflects billing timing rather than real change.
About this page. Written by the Pebbles Ai team for people who run sales, marketing and growth. Last updated .
